A 2023 that is far from easy due to inflation and economic uncertainty
Sentiment-based economic indicators (such as purchasing managers’ indices) point down and get worse from month to month. The inflation surveys are exactly the opposite, showing an increase in expectations. We particularly report the deterioration of the medium-term outlook for the United States.
Core inflation, the one that excludes food and energy prices, stubbornly remains above 6%, ie at its highest in 40 years. While in the US fighting inflation is clearly a central bank’s task, in Europe the political authorities are frantically searching for the most suitable strategy to contain costs, given the general uncertainty caused by large upfront payments for heating and electricity. The markets initially applaud every proposal, but it takes little to decree that the measures are not enough. This creates a vicious circle. Several hypotheses are being examined: one-off contributions, price caps, a common EU strategy for gas purchases… However, the picture is very heterogeneous. In addition to the decisions taken by the EU, the various national realities must be considered. There is talk of “distortion of competition” according to which groups of consumers or companies are favored in the various countries.
The facts, however, force political and monetary authorities to intervene. The conflict in Ukraine has been raging for too long and the resulting increase in energy costs has now affected almost all sectors. All over the world restaurants, service providers, suppliers and manufacturers of branded items are raising prices. What is the best way to break this spiral? How does the situation look for 2023? There is a glimmer of hope when it comes to energy prices. In the United States, gasoline prices fell sharply from their June highs, WTI oil returned to trading at USD 85 per barrel, well below the USD 90 threshold.
In addition, the latest data from the German federal agency that manages the electricity network indicate that gas tanks are almost full (96%), while wholesale prices for gas are significantly lower than last summer’s peaks. . The possibility therefore looms that starting from the spring of 2023 the comparative year-over-year data for energy prices will be much lower than today, and that inflation will slow down as a result. Unfortunately, however, both in the USA and in Europe, a price spiral has been triggered that affects all products and services. We point out in particular the increase in labor costs resulting from the solidity of the employment market. In the United States, the hiring boom continues and the workforce is in short supply. The same happens in Germany.
In addition, transformation costs in the context of the energy transition, repatriation of production in the face of uncertainty related to global supply chains and high housing costs are pushing price indices up. For this reason, we believe that in 2023 we will have to take into account an even more “sticky” inflation, which will not reach the current peaks but will still remain high around 5% -6% and will continue to raise interest rates. As a result, central banks will remain vigilant and further raise policy rates. Markets are hoping for an imminent spike in inflation that could lead to a drop in interest rates, but such expectations are likely to remain disappointed for at least the entire first half of 2023.
Next week
Several sentiment-based leading indicators will be released next week, such as Purchasing Managers’ Indices for all major countries. We will also learn about the ifo index for Germany and the consumer confidence of the core European states, Germany and France. Towards the weekend it will be the turn of the trend in consumer prices in the EU and in the core countries. In the US, the first data on the evolution of gross domestic product (GDP) in the third quarter will be published. Consumer spending and the consumption deflator deserve particular attention, an important figure on inflation that should lead the Federal Reserve to confirm the restrictive line. Equity markets will also be affected by the release of Q3 earnings. In fact, next week, the season of publishing earnings for US companies will be in full swing.
The motto for the next few weeks should be: let’s try not to sink into an “autumn depression”, but to sweep away the piles of fallen leaves and look for new opportunities on the ground.
On the one hand, positive and rising interest rates (at least in nominal terms) offer investment opportunities that we haven’t seen in a few years. On the other hand, valuations of risky assets seem to have adjusted to higher risk-free rates. Equity valuations appear more favorable, and markets are looking ahead and anticipating the future. From a tactical perspective, it is still better to use caution, however investors with a medium to long time horizon can prepare to increase exposure to risky assets.
* Director, Head of Portfolio Strategy Private Clients
#Depressed #October #markets #prepare #nightmare