Consumer

The turmoil in US regional banks will weigh on economic growth. Arguably, it would be better for the broader stock market if growth slowed because banks became more conservative in their lending than if it slowed because the Fed had to raise rates to over 6%. In both cases, economic growth would decelerate but at least in the former scenario, the discount rate applied to earnings would not be as high.

The growth and inflation profiles of the three central European countries are set to diverge. The outlook for Polish and Hungarian Bonds are not attractive anymore. Book profits on them. Instead, initiate a new trade: pay Polish / receive Czech 10-year swap rates.

The Chilean economy is entering a recession. Inflation will drop rapidly and the central bank will cut rates meaningfully in H2 2023. We continue to recommend a structural overweight across Chilean risk assets on the basis of falling inflation and local yields, record cheap valuations, and dissipated political volatility.

A run of hot January data shook up financial markets, but we think they overreacted. We remain constructive on equities and the economy in the near term.

Rather than teetering into recession, global growth has firmed since the start of the year. While we still expect inflation to decline, the risk that central banks will need to lift rates more than discounted has increased. Long-term focused investors should start raising cash allocations by trimming their equity holdings.

In Section I, we address the recent improvement in several data releases over the past three months, and explain why we do not believe that these developments have increased the odds of a soft landing. US monetary policy likely became tight in November, which has started the recessionary clock. We continue to recommend a conservative investment stance over the coming 6-12 months that anticipates eventually lower long-maturity bond yields. In Section II, we explain why the Fed’s unreasonably low neutral rate forecast is the main risk to a conservative investment stance over the coming year, as it could lead to interest rates falling back into easy territory before a recession begins. For now, this remains a possible but not probable outcome.

Pent-up demand for consumer goods and services will boost Chinese household spending this year. Beyond the next 12 to 18 months, however, structural forces will likely drive Chinese household consumption growth lower than in the pre-pandemic era.

We refresh our 2023 plan of attack to reflect the latest data and several rounds of discussions with clients in virtual and face-to-face meetings. We continue to expect a meaningful first-half rally in the S&P 500, despite revising our expected terminal fed funds rate 25 basis points higher.

The risk of a recession in 2023 is being supplanted by the risk of another inflation wave. We will turn more defensive on equities if it continues to look like inflation is making a comeback.

Thai stocks and currency will weaken over the short term. And yet EM equity portfolios should overweight Thailand as tourism revivals will rejuvenate this economy.