CoreMacro

Special Report

After a busy month of global central bank meetings, and rising global bond yields, it is a good time to update our suite of Global Central Bank Monitors to assess the likely next moves from policymakers. The signal from the Monitors in all countries (outside of Japan) is consistent with the “on hold but higher for longer” messaging from major central banks like the Fed and the ECB. Only our Bank of Japan Monitor stands out as clearly signaling the need for tighter monetary policy.

The bear market in US bonds will likely end with a bang rather than a whimper. Even during the secular US bond bull market of 1982-2021, cyclical bond bear markets ended only after an eruption of financial turmoil. It would be strange if this current ascent in bond yields ended without significant casualties in the global financial system.

In this Strategy Outlook, we present the major investment themes and views we see playing out for the rest of 2023 and beyond.

Despite higher oil prices, Colombian risk assets will underperform their EM peers in the months ahead. The domestic economy is evolving from stagflation into recession, and fiscal and political risks will raise the risk premium of Colombian assets. Take profits on the yield curve inversion trade and stay short COP vs. USD.

Special Report

China’s oil demand growth will moderate to a still robust 4%-6% in the next six-to-nine months. We recommend that investors in China’s onshore and offshore stock indexes overweight energy producers.

European stocks and the euro continue to weaken; soon, they will test the bottom of their recent trading range. Which sectors can protect investors against this downdraft?

Emergency pandemic fiscal and monetary policy measures buffered households and nonfinancial corporate businesses in ways that have acted to lengthen the lags between monetary policy changes and their effect on the economy. We believe, however, the extended lags are merely delaying the recession, not cancelling it. We expect to downgrade equities on a tactical basis from equal weight to underweight soon.

The global downturn will be shallower than it was in 2008 and in 2020 but will last for longer. The primary reason for a more prolonged downturn is that policymakers in the US, Europe, and China will be reluctant to proactively and aggressively stimulate. The combination of rising oil prices, an appreciating US dollar, and mounting US bond yields constitutes a triple whammy for US share prices.

The biggest misunderstanding in the markets right now is that to keep expected inflation well-anchored at 2 percent, inflation must undershoot 2 percent for some time. This implies that interest rate futures curves are mispriced, and that the probability of a ‘soft landing’ is lower than assumed. Plus: we show that the rally in oil has become fractally fragile, and recommend a tactical underweight.

The Chinese economy will not recover without significant “irrigation-style” stimulus. The latter is still unlikely for the time being. Dim economic fundamentals justify lower valuations of Chinese equities. Lingering deflationary pressures entail even lower interest rates, which is bearish for the RMB.