The central banks face a dilemma

Investment Policy, May 2023

The central banks face a dilemma

Central banks will slowly but surely find themselves facing a dilemma. While they currently still have to prioritise fighting inflation, which remains too high, both the financial system and the global economy are showing initial signs that a monetary overkill may also pose a threat in addition to rising prices. The central banks are currently taking this into account by providing banks with more liquidity, meaning that so-called quantitative tightening, i.e. the reduction of central bank balance sheets, is unlikely to continue as had been expected. This is resulting in a heightened sense of uncertainty and volatility in the interest rate markets. Against the backdrop of uncertain financial markets, it therefore makes even more sense to focus on stability. We therefore feel vindicated in adopting a cautious investment policy that places an emphasis on quality in both the equity and bond spaces and in attaching importance to cyclical resilience.  

The major central banks have continued their interest rate hikes but have not done so to the same extent. While the European Central Bank (ECB) and the Swiss National Bank (SNB) each raised their key interest rates by 0.50%, the US Federal Reserve (Fed) only implemented a hike of 0.25%. The Fed finds itself facing a kind of dilemma. On the one hand, the currently available data shows that it is not yet possible for a victory to be declared in the fight against inflation and that further interest rate hikes are likely to be necessary. On the other, the turbulence observed in the banking space illustrates that the inverted yield curve is causing the financial sector (including real estate firms) increasing problems. This needs to be taken into consideration. The Fed, like other central banks, has so far chosen the path of providing extensive liquidity support in order to ensure financial stability. It is conceivable, however, that the financial markets will test the resolve of the central banks over the coming months, especially if there are renewed tensions at US financial firms. It will then have to be seen whether the US interest rate cuts already anticipated by the market for the second half of the year are in line with the wishes of the Fed or whether the financial markets have been overly optimistic in their outlook.


Until this question can be answered with some certainty, a cautious investment policy should remain a priority. After all, the reason for pricing in US interest rate cuts could be positive or less positive in nature. A decline in core inflation would be a positive reason. However, if this were to go hand in hand with a marked economic slowdown, it would be less positive. What should not be forgotten is that turbulence in the banking sector serves to reduce economic growth, as financial institutions become more cautious in their lending activities. In the US, regional banks, which have recently come under the spotlight and have total assets of less than USD 250 billion, are responsible for 70% of commercial real estate lending and 50% of outstanding corporate loans. Over the coming months, we would therefore not be surprised to observe a slowly more palpable economic slowdown. In terms of equity investments, we thus favour a mix comprising securities that do not have high valuations due to interest rates that are clearly heightened by historical standards (value) and, most importantly, quality stocks in terms of the stable profitability they offer even in a weaker economic climate. It is for this reason that we are giving preference to an overweighting of the more defensive Swiss equity market.

Over the coming months, we would not be surprised to see a clearer economic slowdown.

Gérard Piasko, Chief Investment Officer


The global bond markets are being dominated by two opposing factors that could last for some time to come. On the one hand, the tensions in the banking sector are giving hope that there may be a break in the Fed’s interest rate policy or that it may even be reversed (pivot). Some interest rate cuts have already been priced into the bond markets, however. On the other hand, inflation figures, both in the US and Europe, mean that it is not yet possible to give a real all-clear. The market could therefore trend sideways. While interest rate jumps such as the record 1% yield changes seen in March are unlikely to be seen, the bond markets will remain turbulent until the economic and inflation outlook become clearer. In light of the continuing uncertainties, a quality-oriented positioning in the bond space should also be favoured. Given their relatively attractive risk/return mix, we are maintaining our overweight position in bonds with good credit quality or an investment grade rating, which we prefer over more cyclical high-yield bonds


The fluctuation range for the world’s major currencies has been extremely high by historical standards in recent months. Expectations of interest rate changes by the ECB and the Fed have played a particularly important role here. The euro initially lost ground against both the US dollar and the Swiss franc. However, when the ECB hiked key interest rates by more than the Fed, the euro was able to recover once more against the greenback. The SNB increased its key interest rates by the same amount as the ECB, meaning that the euro was more or less stable against the Swiss franc. Nevertheless, the Swiss franc is likely to remain stable and attractive by international standards due to lower inflation than in the Eurozone and higher inflation-adjusted interest rates (higher real interest rates).


The price of crude oil has been particularly volatile recently against the backdrop of the economic fears arising from the turmoil in the banking sector. Following a marked decline of 20%, which was caused in part by the increase in US oil inventories, the oil price recovered once more when the OPEC+ countries decide to reduce production. Should the turmoil in the banking sector raise its head again, however, heightened volatility would again have to be expected in cyclical commodities such
as industrial metals and crude oil. This is because banks would likely become more cautious in their lending activities, a scenario that tends to weaken the economy. In this context, the better performance posted by gold comes as no surprise in the turbulent times we are seeing once more. However, after reaching the mark of around USD 2,000 per ounce, gold appears somewhat technically “overbought” in the short term. While some profit-taking would not surprise us, gold has shown, as it did last year, that it should be an important component of a diversified portfolio in politically difficult and economically complex times.

Gérard Piasko

Gérard Piasko

Gérard Piasko is Chief Investment Officer and head of the investment committee of private bank Maerki Baumann & Co. AG. Before he was for many years Chief Investment Officer of Julius Baer, Sal. Oppenheim and Deutsche Bank.

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This publication is intended for information and marketing purposes only, and is not geared to the conclusion of a contract. It only contains the market and investment commentaries of Maerki Baumann & Co. AG and an assessment of selected financial instruments. Consequently, this publication does not constitute investment advice or a specific individual investment recommendation, and is not an offer for the purchase or sale of investment instruments. Maerki Baumann & Co. AG does not provide legal or tax advice. In addition, Maerki Baumann & Co. AG accepts no liability whatsoever for the content of this document; in particular, it does not accept any liability for losses of any kind, whether direct, indirect or incidental, which may be incurred as a result of using the information contained in this document and/or arising from the risks inherent in the financial markets.

Editorial deadline: 24 April 2023

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