A shallow recession looms, but the Fed will not pivot in time

Policy divergence will continue to be a key theme in global FI markets in 2023. Whereas we pencil in a rate pause, rather than a pivot, in the US next year, the hiking cycle is still ongoing in Europe and will extend well into 2023, with considerable uncertainty as to the terminal rate.

What you will learn:

• We thus continue to favour OW duration in the US, UK and Canada focusing on the belly of the curve in contrast to an UW position in broad European fixed income and Japan.
• In Japan, our base case is that YCC is likely to hold in the near term but we see an eventual YCC exit taking the form of an adjustment in policy; tolerating a modest upward shift in the yield curve achieved by formally abandoning NIRP and widening the target range for the 10y yield.
• This month we demote Australia to N from OW and promote Norway instead. The commodity price slowdown is already affecting Norway more than Australia. The latter is still poised to regain some momentum following a phased exit from zero-covid policy in China in 2023.