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Having benefitted from enormous fiscal and monetary policy stimulus in 2020 and 2021, the world economy will have to adjust to a new policy reality going forward.
Engineering a smooth landing is never easy, and engineering a soft landing in the context of the current business cycle (extreme lows, followed by extreme highs) will be harder still.
Emerging Markets Outlook
Incoming macro data out of emerging markets (EM) remains mixed, mirroring Covid developments. However, we have kept our EM growth forecast unchanged and expect GDP to grow by 5.0% in 2022.
Driven by inflation and debt concerns, EM central banks are well ahead of developed market counterparts in terms of monetary policy normalization and many could be done tightening by mid-year.
Global Capital Markets
The Fed is being called upon to maneuver deftly using tools ranging from interest rate policy and forward guidance to lending operations and the unwinding of asset purchase programs.
It is unclear if an upcoming Fed rate-hiking cycle coupled with high inflation risks inevitably mean that bonds will fare poorly in 2022.