Increasing risk of recession

The markets have rapidly priced in the Fed’s and ECB’s latest hawkish shifts, with government bond yields spiking, credit spreads widening and equities falling sharply in recent weeks. Yields and spreads are at multi-year highs and global equities 20% below their December peak, so inflation will have to rise further and economic growth disappoint for markets to fall more. But with labour markets still tightening and the conflict in Ukraine far from easing, we believe inflation has not yet peaked. This makes it hard for central banks to become less hawkish.