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Macroeconomic Outlook

Ovie Koloko
By Ovie Koloko, Chief Product Officer Feb 15, 2024
Macroeconomic Outlook


Persistent inflation has been the scourge of central banks for two years. Ever since Russia invaded Ukraine and provoked a global energy crisis, monetary policy committees have been forced to drive up interest rates in a bid to bring spiralling prices under control.

That intervention has proved largely successful with inflation starting to ease, but rates remain frustratingly sticky which is keeping interest rates higher. In the US inflation is predicted to sit at 3.4% this year[i], the UK’s consumer prices index rate is forecast to average 3.1% in Q4 2024[ii], and the European Central Bank forecasts rates of 2.7% by end of the year[iii].

Projections for interest rates across these major western economies are for falls but only slowly and cuts are unlikely to come before the second half of the year. And while inflation is nowhere near the double-digits of 2022, if it refuses to continue a downward trajectory, we can expect central banks to revert to quantitative tightening measures. Further contributing to the macroeconomic uncertainty this year is the not insignificant factor of the election Supercycle which sees more than half the world head to the polls. This massive electoral activity includes both the UK and US, which will affect both domestic and global economies, creating a major source of near-term uncertainty. The recent period of quantitative tightening (QT) means central banks no longer dominate the demand for debt. Replacing them are investors who expect a greater reward for holding longer-dated bonds. As such 2024 will likely see a steeper yield curves, with a larger difference between long- and short-term bonds. This environment tips the balance away from traditional income-generating asset classes, such as equities, towards long-term bonds for potentially reliable sources of return. On the flipside, as QT starts to ease, investors may look to corporate issuers for better interest rates. This may well leave them vulnerable to risk of default, especially if the more pessimistic predictions of a hard landing in tough financial conditions are realised. For investors attempting to navigate this unpredictable landscape, particularly those with asset/liability profiles linked to inflation and interest rates, implementing swap strategies could provide greater comfort for the future.

Growth in the over the counter (OTC) derivatives market is testament to the importance of inflation and interest swaps in managing volatility. The global Triennial OTC Derivatives market size was valued at USD 18.38 million in 2024 and is expected to expand at a CAGR of 3.14% to 2031, reaching USD 22.11 million by 2027[iv].

However, with so many more players operating in the OTC market, and with myriad factors influencing how the markets behave, investors need access to reliable data to help inform decision making and ensure best execution. Last year we launched a new family of interest rate swap volatility (IRSV) indices which provide market participants with a forward-looking implied volatility measure for some of the most liquid option expiry, swap tenor combinations in the EUR and GBP interest rate swap markets. The indices, which are informed by input data and analytics from ICAP, use a theoretical foundation for measuring interest rate swap volatility, providing market participants with a model-free measure of spot implied volatility. This approach has been shown to have superior predictive power over other commonly used volatility forecasting measures.[SG1] [v] Such data driven indices will continue to evolve to offer investors tools to better navigate and inform their interactions with the inflation swaps market, with Parameta Solutions offering some exciting developments in this space in 2024. The end may be in sight for high inflation but there is still a long way to go before desirable levels are met, and investors can expect some bumps this year before normal services are resumed. In the meantime, an evolving and advancing OTC derivative market supported by cutting edge data and analytics, will provide much needed assurance as the year plays out. [i] Trading Economics

[ii] UK Parliament Commons Library

[iii] ECB Europa

[iv] Precision Reports: Triennial OTC Derivatives Market Size In 2024: Share, Latest Trends &Forecast 2024 To 2031

[v] BIS

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