Delayed reaction, liquidity contraction

Delayed reaction, liquidity contraction


Brett Lewthwaite

  • Senior Managing Director, Deputy Head of Credit
  • Read bio

The Macquarie Fixed Income Strategic Forum

One of the challenges with investment management is balancing the short term noise of financial markets with a longer term assessment of the investment and economic landscape. The Macquarie Fixed Income Strategic Forum is held three times a year, comprising over 130 investment professionals, and operates to establish our medium term views and strategic portfolio positions.

Key takeaways from the the latest forum

Delayed reaction

Delayed reaction

Inflation is slowing across the globe and central banks have been slowing down the magnitude of the rate hikes. However, the significant tightening of monetary policy in 2022 has yet to reveal its impact on the economy and markets...mind the lags.

Inflation, it's so last year

Inflation, it's so last year

Inflation has peaked with supply recovering while demand has cooled amid the most aggressive monetary policy tightening in decades.

The most anticipated recession​

The most anticipated recession​

The global economy heads into the highly anticipated recession in a stronger position than past cycles (resilient balance sheets and savings), hence it could be a cyclical shallow recession. However, there are more downside risks as the effects of the significant tightening have yet to be felt. Consensus is expecting a recession this year, but the real question is whether it will be a soft or hard landing for financial markets.

Liquidity contraction​

Liquidity contraction​

We had a very long period of quantitative easing (QE), with ample liquidity and significantly low interest rates and cost of capital, which supported asset prices. We are currently in the opposite environment of quantitative tightening (QT), high levels of interest rates and cost of capital, but asset prices have not readjusted lower. Because of this, we are mindful of a liquidity contraction.



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Diversification may not protect against market risk.

Market risk is the risk that all or a majority of the securities in a certain market – like the stock market or bond market – will decline in value because of factors such as adverse political or economic conditions, future expectations, investor confidence, or heavy institutional selling.

Inflation is the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.

Liquidity risk is the possibility that securities cannot be readily sold within seven days at approximately the price at which a fund has valued them.

Quantitative easing (QE) is a form of monetary policy in which a central bank, like the US Federal Reserve, purchases securities from the open market to reduce interest rates and increase the money supply.

Quantitative tightening (QT) refers to when central banks raise the federal funds rate. In a tightening monetary policy environment, a reduction in the money supply is a factor that can significantly help to slow or keep the domestic currency from inflation.

Recession is a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in gross domestic product (GDP) in two successive quarters.

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