Financial markets are at a pivotal point in the capital cycle. In advanced economies, the major central banks are beginning to tighten monetary policy and governments are slowing their pace of spending. Keeping track of how economic policy “pivots” (tighter) in 2022 in response to strong growth and high inflation, and whether this is offset by household and corporate spending, is key for portfolio strategy.
Our prosperity dashboard, which aims to help investors track the key features of the economy and understand the future risk-and-return environment, focuses on the following four categories:
New COVID-19 infections globally over the month to 25 January 2022
The dial highlights whether the macro driver is contributing to high, medium, or low financial risk
Our forecast for the fiscal deficit in advanced economies (% of GDP) at the end of 2022 – this is stimulative relative to economic conditions
Current real policy rates in the US, i.e. the federal funds rate minus current inflation
Current headline CPI inflation in the US with the recent direction of change
Average hourly earnings growth (year-on-year) in the US, with the recent direction of change
US inflation markets are pricing-in average US inflation between 2027-31 to be a little below the Fed’s target; other measures of expectations have increased over the past year
The personal savings rate in the US and elsewhere has partially normalised; however, households still enjoy significant excess savings, which could be spent
Holdings of cash by US businesses (as a % of GDP) are at elevated levels
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