February Global Macro Monthly - Economic cross currents and central bank re-pricing

Key points

• Despite a number of cross-currents, the global growth outlook for 2023 looks firmer. This is driven by a post-COVID re-opening acceleration in China, a better-than-feared winter in Europe, and a stronger-for-longer US.
• Inflation has fallen sharply, but mainly in headline terms. Core inflation – particularly services inflation – has remained more persistent and should remain elevated while labour markets are tight. Upside employment surprises in the US and Canada perpetuate this. Euro area inflation risks also look increasingly home grown.
• Central banks will have to respond to this persistence. The ECB has signalled further tightening and is about to begin to unwind its asset purchases. The Fed looks likely to hike by more and we continue to expect a further hike from the Bank of England and see some risk from the Bank of Canada, despite its “conditional pause”.
• Rate markets have recognised this risk and repriced accordingly. The expected Fed pivot is all but removed.