Currencies
In Section I, we note that while recent inflation developments point to some supply-side and pandemic-related disinflation, they also point to potentially stickier inflation over the coming several months. The inflation, monetary policy, and geopolitical outlook remains sufficiently risky that an overweight stance towards equities within a global multi-asset portfolio is not justified, and we continue to recommend a neutral stance for now. This month’s Section II is a guest piece written by Martin Barnes. Martin, who retired from BCA Research as Chief Economist last year after a long and illustrious career, discusses the outlook for government debt and the possibility of an eventual crisis.
We recommend that investors use the following framework to think about whether potential disinflation would be bullish or bearish for share prices: disinflation will prove to be bullish for global share prices if it is due to an improvement in supply-side dynamics, but bearish if it is demand driven. We believe it is the latter.
It takes time for wage inflation to die. So, if 2022 was the year that central banks’ monster tightening killed bond and stock market valuations, then 2023 will be the year that it finally reaches the economy and kills profits, jobs, and the wage inflation that has so far refused to die. This means that commodity prices have substantial further downside, while healthcare relative performance has substantial further upside.
Is a Plaza Accord 2.0 necessary? If so, why? If not, what could stem the rise in the dollar, or will it continue to overshoot? In our view, there are fundamental reasons not to bet on a new accord, but that does not necessarily help with investment strategy.
Is the US in a wage-price inflation spiral that could lead to more aggressive Fed rate hikes? Is it time to buy UK Gilts after a wild month of volatility? We answer "no" to both questions, as we discuss in this week’s report.
The kinked Phillips curve not only explains why inflation surged last year but makes a number of surprising predictions, chief of which is that inflation could fall significantly over the coming months without a major increase in the unemployment rate. In the near term, that is bullish for stocks.
A country’s external balance remains one of the key pillars of the longer-term trend for the exchange rate. In this week’s report, we look at the developments in global basic balances, and their implications for currency strategy.