Week in review

• U.S. Federal Reserve raised rates by 25bps
• Bank of England raised rates by 25 bps
• UK February headline inflation surprised to the upside at 10.4% y/y

Week ahead

• U.S. real GDP, consumer confidence
• Europe consumer confidence, unemployment
• Japan retail sales, unemployment

Thought of the week

From September 2022 to January, the U.S. dollar weakened over 6%, leaving investors wondering whether we are now on a cycle of dollar weakness. There are reasons to believe so. From a valuation perspective, after ten years of strength, the dollar is close to its highest level since 2001 and expensive versus long-term variables that define its “fair value”, such as the current account. From a growth standpoint, from 2012-2022, the rest of the world only grew 0.5 percentage points more than the U.S., a stark difference versus the 2.3 percentage points from 2001-2011. This gap is set to widen again in favor of the rest of the world to 1.2 percentage points over the next five years. Finally from a policy perspective, from 2012-2019 and in 2022, interest rate differentials between the U.S. and other countries widened, as the Federal Reserve (Fed) was more hawkish than other central banks. By October, U.S. 10-year yields were 2.2 percentage points higher than other developed markets. Since then, yield differentials shrank to 1.7% as other central banks joined the tightening trend. This gap is set to shrink further should the Fed pause and soon start cutting rates, as seems more likely after the regional banking stress. An obvious beneficiary would be emerging market and Asian equities, which have historically benefitted from a weaker U.S. dollar.

EM central banks are aggressively hiking Policy rate

Source: FactSet, J.P. Morgan Asset Management. Data reflect most recently available as of 25/03/23.

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