Three critical connected factors drove markets in Q1: economic activity across the developed world surprised on the upside; inflation proved to be more persistent; and labour markets remained tight. The probability of recession has fallen, that of a soft landing increased. As a result, market expectations for cuts in policy interest rates were reined in, and the timing delayed. Bonds responded to the likelihood of rates staying higher for longer with yields up across the maturity curve, driven by both higher real yields and a rise in inflation expectations. Equity investors, on the other hand, were buoyed by the resilience of economic activity and were prepared to look through the delays in interest rate reductions to the easing cycle that will ultimately come and to the impact on corporate profits of improving economic prospects through 2024 into 2025.
