Recent weeks have seen significant moves in financial markets, impacting government bonds in particular. How has this altered our views?
In the past month we have seen a Fed hike, significant moves in government bond markets, renewed concerns around Eurozone sovereign debt and some volatility in global semiconductor equities. The situation in politics and markets remains fluid.
As always, we start with our scenario probabilities, where we have more firmly made ‘warming up’ our central scenario, with ‘too hot’ – involving three or more additional hikes from the Fed – remaining the main tail risk. We reduce the probability of no hikes (‘just right’) or cuts (‘too cold’) to zero: something drastic would have to change for these to be realised given our growth, inflation and labour market outlook. The market continues to put a much higher probability on our ‘too hot’ scenario.
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