Inflation/Deflation

Today, we are sending you the BCA annual outlook for 2023. The report is an edited transcript of our recent conversation with Mr. X and his daughter, Ms. X, who are long-time BCA clients with whom we discuss the economic and financial market outlook for the next twelve months toward the end of each year.

In this Special Report, we consider what some common monetary policy rules are recommending for the major central banks and derive conclusions on duration strategy and country allocation for bond investors. We conclude that rate hike expectations in most countries may appear appropriate given the current global backdrop of high inflation and low unemployment, but look elevated on a forward-looking basis versus slowing global growth and peaking global inflation.

The latest CPI and PPI releases, the modestly less hawkish turn in Fed officials’ comments and evidence that consumers continue to spend with some relish support our constructive near-term views on equities and the economy.

What is the outlook for the European housing market amid rising mortgage rates and the energy crisis? Does housing represent a systemic risk? Can households weather the storm? And what are the opportunities, if any?

The narrative that the US can tolerate much higher interest rates, compared to the rest of the world has helped the dollar in 2022. In this report, we examine the sustainability of this thesis, from our holistic assessment of global growth indicators.

The kinked supply framework helps explain why US inflation rose so suddenly shortly after the pandemic began and why the economy is likely to experience a benign disinflation over the next six months.

The decline in the US CPI is a tailwind for European stocks, but does it compensate for weaker global growth?

In this report, we identify the Norwegian krone as a currency that could outperform especially at the crosses, irrespective of the broad dollar trend.

CBs proved to be savvy buyers of gold over 3Q22, scooping up record volumes of the metal as prices remained weak. The exorbitant privilege accorded the USD’s reserve-currency status will continue to erode as EM states move to insulate themselves against US financial and trade sanctions being turned on them. Based on our modeling, we believe as long as the Fed is intent on keeping the real effective USD exchange rate and real UST rates positive, demand for higher CB gold reserves will persist. Given this view, we are getting tactically long gold at tonight’s close.

While there is much variability in company profitability, earnings contractions have commenced and appear to be broad-based. We expect earnings growth to deteriorate further into year-end. Companies are reporting concerns about the trajectory of future economic growth and the uncertainty that it brings. Consumer spending on goods has slowed sharply, while spending on discretionary services has surprised on the upside. Business-to-business spending is still strong.