Pause in sight but longer adjustment

This is an excerpt from Santander’s Market Outlook for Q3. For more information on how the markets are resetting, read the full report here .

After the most accelerated period of interest rate hikes in decades, it's time for central banks around the world to ask themselves: has the amount of monetary tightening been enough to bring inflation back within target, or is there still more to be done?

Pausing soon (but remaining higher for longer)

Price pressures are clearly on a downward trend but work remains to be done on the core and services inflation fronts. This, coupled with the high dose of monetary tightening already in place, should allow central banks to justify a pause in rate hikes. However, rate cuts will be delayed until cooling of the labor market becomes more evident. This means that the market will be experiencing higher interest rates for longer than expected, creating a delicate situation for central banks. But we believe that a pause is the best decision during the third quarter of 2023.

A moderate and staggered adjustment

Economic growth was surprisingly resilient in the first half of 2023. In the meantime, major geopolitical and economic risks have either been diminished or removed altogether. We have increased growth estimates for 2023, but the slowdown is now shifting to 2024 and economic growth will remain anemic for some time. We are witnessing a staggered economic adjustment relative to other cycles of monetary tightening. Our view is moderately optimistic (low growth and a low probability of crisis).

Opportunities to rebalance portfolios

We believe that this macroeconomic scenario (high interest rates and slower economic adjustment), combined with attractive valuation levels, creates a favorable environment for the construction of diversified portfolios. Historically, a pause in interest rate hikes has been positive for fixed income returns. In addition, we are witnessing important disruptions in AI and energy transition.

For more information, read the full Global Market Outlook for Q3.

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