Global markets revise economic forecasts
2023.02.22 11:05
Global markets revise economic forecasts
By Kristina Sobol
Budrigannews.com – Markets are reducing their appetite for risk assets and government debt in preparation for a “no landing” scenario in which global economic growth is resilient and inflation stays higher for longer.
Investors have been betting for months that global growth will slow just enough to slow inflation and get hawkish central banks to stop raising rates.
Since October, the idea that the Federal Reserve of the United States and other central banks use monetary tightening to engineer a mild, soft landing before pivoting to avoid a deep recession has supported a cross-asset rally, depressed the value of the dollar, and caused capital to flow into emerging markets. However, traders are considering a new scenario in which inflation remains stable and economic growth continues to be sustained, based on recent data that reflects tight job markets.
As a result, risk assets could suffer as interest rates rise. Wall Street experienced its worst day of the year thus far on Tuesday, while world stock markets fell to one-month lows on Wednesday.
“We’ve gone from softer landing to no landing,” EdenTree Asset Management’s head of fixed income David Katimbo-Mugwanya said. “No landing because (financing) conditions will remain tight.”
In January, job growth in the United States sharply accelerated, inflation remained elevated in the United States and Germany, and business activity in the United States and Europe rebounded in February.
Investors are now betting on higher rates, which are expected to peak in July at approximately 5.3 percent in the United States, up from approximately 4.8 percent in the beginning of February. Investors are no longer betting on rate cuts later this year.
Deutsche Bank (ETR:) said this week that it expects rates from the European Central Bank to reach a peak of 3.75 percent, up from 3.25 percent in the past.
According to Richard Dias, founder of the macroeconomic research firm Acorn Macro Consulting, China’s reopening, an end to Europe’s gas crisis, and robust consumer spending in the United States “are probably more bearish than positive for markets.”
He stated, “We’re getting into a situation where bad news is good news.”
“If wage growth stays high and demand stays high, then the Fed will push up interest rates further, and that’s not a good environment for equity or bond markets,” says Paul Flood, head of mixed assets at Newton Investment Management.
When expectations of higher cash rates make their fixed interest payments less appealing, bond prices fall and yields rise. When bond yields rise, stocks typically move lower to reflect the increased risk of owning shares.
are close to their highest level since November, almost 4%, up from a low of 3.3% in January. As rate-hike bets boost the greenback, an index measuring the dollar against other major currencies is set for its first monthly gain in five months.
RESERVATION RISK GONE? In December, most financial specialists anticipated the U.S. economy to contract somewhat this year yet the agreement currently is for 0.7% development. The Federal Reserve has indicated that they will likely keep raising rates for a longer period of time than initially anticipated.
Midway through January, as energy prices fell, most expectations for a recession in the Eurozone vanished. As long as growth continues, Reuters economists expect inflation in the bloc to remain above its target of 2% into 2025. According to Florian Ielpo, head of macro at Lombard Odier Investment Managers, “the road map was one of a shallow recession and declining inflation.” The evidence challenges that consensus.”
A lot of investors still think that inflation will go down, and they think that recent strong data is probably supported by one-time factors like a winter that was unusually mild and the rest of consumer savings from the COVID-19 pandemic.
Spouting Rock Asset Management chief strategist Rhys Williams stated, “There should be more signs of a slowdown as the year unfolds and the weather normalizes, and there’s just not another pent up savings to spend as we go into the second half of the year.” According to Thomas Hayes, chairman and managing member of Great Hill Capital, which is based in New York, a soft landing is still likely due to falling rental costs in the United States beginning to weigh on inflation metrics and rising labor market participation as consumers run out of savings, which helps to limit wage growth.
He stated, “It is going to be very difficult for inflation to re-accelerate after the Fed pauses” if oil does not rise above $100. Ielpo of Lombard Odier stated that while he had “happy to not have more” equity risk, he had not significantly altered the positioning of his funds since January. EdenTree Asset Management’s Katimbo-Mugwanya said that long-dated bonds still offered value because he thought central banks were still getting closer to the end of rate-rise cycles.
“Data is a bit more robust on the economic front than maybe we were led to believe at the turn of the year,” he continued, “there’s no pressure on them to start signaling a looser stance just yet.”
