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MAC Monitor — January 17, 2023

Multi-Asset Class Risk Monitor Highlights | Week Ended January 13, 2023

  • Dollar falls to 7-month low as decelerating consumer prices take pressure off Fed
  • Easing inflation and rate expectations boost UK shares and bonds alike
  • Rising cross-asset correlations severely limit diversification opportunities

Dollar falls to 7-month low as decelerating consumer prices take pressure off Fed

The Dollar Index—a measure of the USD’s value against a basket of major trading partners—dropped to a 7-month low in the week ending January 13, 2023, as a continuing decline in US inflation further eased the pressure on the Federal Reserve to tighten monetary policy. Overall consumer prices fell 0.3% in the month of December, taking the headline CPI almost back to the level from last June. Barring major price shocks in the coming months, the corresponding year-on-year inflation rate would be set to descend toward the 2% central-bank target by summer, which could allow the Fed to ease monetary conditions in the second half of the year. Accordingly, short-term interest-rate future markets continued to predict that the effective federal funds rate will fall back to 4.5% by year end after peaking just under 5% in June, thus defying explicit warnings from FOMC members not to expect any rate cuts before 2024.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated January 13, 2023) for further details.

Easing inflation and rate expectations boost UK shares and bonds alike

UK share prices soared and borrowing costs plummeted in the week ending January 13, 2023, as bigger-than-expected declines in US and continental European inflation raised hopes of a similar deceleration of consumer prices in the UK. The STOXX® UK 180 index climbed to an all-time high on Friday, while long-term Gilt yields dropped by up to 20 basis points, boosting the prices of bonds with maturities of two years or longer. The concurrent rally in both markets was fueled by a downward revision in interest-rate expectations, as traders lowered their year-end projections for the Bank of England base rate by nearly a quarter of a percentage point.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated January 13, 2023) for further details.

Rising cross-asset correlations severely limit diversification opportunities

The predicted short-term risk of Qontigo’s global multi-asset class model portfolio rebounded to 12.7% as of Friday, January 13, 2023, after having fallen to 10.9% the week before. The surge in total portfolio volatility was mostly due to a stronger co-movement of stock and bond prices as well as -foreign-exchange rates against the US dollar, which all rose in unison, thus severely limiting diversification opportunities. US investment-grade corporate bonds experienced the biggest growth in their percentage risk contribution from 3.6% to 5%, as they received an additional boost from tighter credit spreads.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated January 13, 2023) for further details.