2023 1st half review and 2nd half outlook

George Goncalves, MUFG Head of U.S. Macro Strategy, reflects on the price action and economic developments of the 1st half and provides us with thoughts on some of the risks that may lie ahead in the 2nd half. George believes that the markets caught a big break on the back of overly defensive posturing resulting in investors having to chase performance and close out short-positions and underweight level to benchmarks during the start of the year. Granted economic conditions in the U.S. were more favorable than initially feared, the overall global backdrop, especially on manufacturing side continues to weaken. Meanwhile we have central banks that have returned to hiking and the Fed has signaled that they are not done either after having skipped at the June FOMC. In our view, after a somewhat muted reaction to Fed tightening we believe the long and variable lags may actually hit harder now as we go through the 2nd half. George remains skeptical the regional bank crisis is fully resolved and that coupled with off-shore dollar liquidity draining could serve as a catalyst for risk-off.