Difficult balance between growth and inflation

This is an excerpt from Santander’s Market Outlook for Q4. For more information on how the markets are resetting, read the full report here .

After the steepest interest rate hikes in decades, central banks and markets are shifting their focus from containing inflation to supporting growth. Which economies are leading the charge, and how quickly can we turn the dial?

Focus on inflation in Europe and the U.S.

The market is starting to show a high probability that both the US Federal Reserve ("Fed") and the European Central Bank ("ECB") have completed the process of interest rate hikes. However, we believe that the focus will remain on controlling inflation for some time, and we rule out rate cuts in the short term. The risk of deterioration in economic growth fundamentals remains elevated in the coming quarters. Our belief is that growth will decrease only moderately due to a stronger-than-anticipated labor market and robust consumer spending bolstered by pandemic savings and credit usage. Rates should remain higher for longer and this is going to imply a headwind in terms of growth.

Focus on growth in emerging markets

China failed to meet expectations of a rebound in growth after the reopening. This is creating cause for concern in the real estate sector and the country is once again exporting deflation to the rest of the world. There are doubts about the effectiveness of the Chinese government's measures to shore up growth. In other emerging economies, central banks have made substantial progress towards their goal of controlling inflation with early and decisive action. As a result, they have already shifted the focus to growth and have started to cut interest rates. This is the case in Chile, Brazil, Peru and Uruguay, as well as Poland – although the latter is focusing on growth despite high inflation.

Time to lock in high interest rates

Monetary policy tightening has brought interest rates to their highest level in decades. Interest rates have most likely reached their final level and that supports the attractiveness of increasing exposure and duration in bond portfolios. Investors may also want to keep equity exposure at moderate levels as long as the risk of further adjustment in earnings estimates persists.

For more information, read the full Global Market Outlook for Q4.

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