SSGA: Disinflation trend underpins rate cut potential

May 5, 2023

State Street Global Advisors has published its Q2 Outlook for the global economy, emerging markets and the global capital markets.

These are the key points made by Simona Mocuta, Chief Economist, and Jerry Holly, Senior Portfolio Manager.

Global economic Outlook

One quarter into 2023 and the outlook has not improved much since our assessment at the end of last year. Indeed, apart from inflation, very few things are likely to get much better from here. And the curve ball of banking sector turbulence in Q1 has added a new source of uncertainty. Overtightening risks now more acute. Liquidity withdrawal and demand slowdown accentuate the unfolding global disinflation, facilitating a policy pivot towards lower rates.

• United States: Time to Reassess – disinflation trend underpins rate cut potential, chances of recession through end-2024 have risen and now slightly exceed 50%
• Eurozone: Upgrading Prospects for 2023 – meager consumer spending growth but tourism inflows should help limit the damage; broad-based slowdown but no outright contraction in any particular segment of the economy

Emerging Markets Outlook

Mixed performance likely across EM economies, with a China reopening rebound being a key performance driver.

China’s reopening should boost EM growth performance, but risks remain. In the near term, the rebalancing away from goods to services consumption globally — but particularly so in the United States — can create some headwinds for those economies geared directly towards goods production. This includes China and it also includes some commodity exporters.

By contrast, service-oriented economies, especially those well-positioned to capitalize from what is likely to become a noticeable wave of foreign travel by Chinese tourists, should experience a growth boost. Reshoring is a slower moving but much longer lasting theme, one that is bound to introduce more differentiation across EM economies in coming years. 

Global Capital Markets Outlook

There is often information to be learned from the behavior of crowds and we think that excessive bearish sentiment is likely one of the factors underpinning equity market resilience today and in the near-term. Cash and fixed income assets largely look attractive from a cross asset valuation perspective, but sharp re-pricings in the expected level of interest rates suggest future gains may be harder to come by.