Growth Expectations Improving

Market dynamics and investor sentiment are indicative of improving global growth expectations, says Alessio de Longis, senior portfolio manager and head of tactical asset allocation for Invesco Investment Solutions. While it is premature to read recessionary signals from the yield curve at this stage, he says a positive 200 basis point slope between three-month and 10-year yields indicates favourable credit conditions. Despite the sharpest increase in bond yields since the U.S. Fed tightening cycle of 1994, growth sensitive assets such as equity and risky credit have outperformed, on average, safer asset classes such as government bonds and investment grade credit over the past three, six, and 12 months. The repricing of higher discount yields has not led to a repricing of lower growth expectations via lower equity or credit excess returns, which are directly related to growth risk in the economy. As a result, global risk appetite is pointing toward improving growth expectations for the first time since November 2021, before the Omicron shock. “In other words, the downside risks to growth flagged in our last update did not materialize. However, we continue to register upside risks to inflation, as the commodity shock from the Russia/Ukraine conflict puts upward pressure on commodity prices, yet to be reflected in headline and core inflation statistics,” he says.