Credit Outlook: Stuck between a rock and a hard place

• Markets are stuck between a stubborn inflation environment and a recession
• Central banks may have to force a slowdown in order to combat inflation
• Buy-on-dips (and sell the rally) strategy remains our preferred approach

Markets have been talking about the upcoming US recession for more than a year. Over the past few quarters, we have elaborated about the increased risks of a recession, too. As of yet, a recession has not arrived. In Europe, Germany did recently slip into a technical recession after we witnessed two consecutive quarters of negative GDP growth. The decline in growth is being driven by the industrial sector. The consumer, however, does not feel this negativity as unemployment remains low.

Economic growth has been maintained by the consumer, both in the US and in Europe. The services sector has recovered to above pre-pandemic levels, thanks to strong consumer spending. This has resulted in inflation being stickier than anticipated. To alleviate inflationary pressures, the very tight labor markets need to cool off. Both the Fed and the ECB have been forced to keep their hawkish stance and hike rates further.

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