Policy

The Fed will respond to December’s CPI report by downshifting to a 25 bps hike pace next month. We anticipate two more 25 bps hikes before the Fed goes on hold.

Why will Chinese consumer spending recover but not its industrial sectors? Will China's reopening boost the global business cycle and inflation? How fast will US core inflation fall and what are the implications for corporate profits? Are global equities pricing in enough bad news/profit contraction?

How to play China's reopening? What are the dichotomies in the performance of China's plays in financial markets? Why has the Chinese central bank tightened liquidity since October and what has been the impact on local rates and the RMB? Is global growth about to bottom? What is the outlook for EM stocks, currencies, credit markets as well as the broad-trade weighted US dollar?

China's economic recovery will be led by consumer spending on services rather than the industrial sector. The current equity market leadership – outperformance by tech stocks – is unsustainable. Persistent deflationary forces will compel policymakers to inject more liquidity and bring down interest rates to reflate the economy. Hence, the RMB will resume its decline against the USD soon.

Slowing growth would be bad for equities, but so would stronger growth since it would mean more rate hikes.

In Section I, we note that the global growth outlook has modestly deteriorated over the past month, despite an improving 12-month outlook for Chinese domestic demand in response to the imminent end of the nation’s “dynamic zero-COVID” policy. Investors should remain conservatively positioned over the coming year, as we recommended in our Annual Outlook report. In Section II, we examine whether the structural risks facing global stocks are higher or lower today than they were prior to the global financial crisis, and what that implies for stock and bond risk premia.

In this, our final report of a tumultuous year, we summarize our policy outlook for the “Big 4” central banks – the Fed, the ECB, the Bank of England (BoE) and the BoJ – and the associated bond market implications for 2023.

This week we present our outlook for the Fed in 2023.

Investors were heartened by the November CPI report, but the Fed said not so fast. Although it snuffed out the latest mini-rally, ongoing disinflation will set the stage for another one early next year.

Both the US and China have structural imbalances that need correcting. The former has a structurally imbalanced labour market in which demand far outstrips supply. The latter has a massively overvalued housing market. The concurrent correction of these two structural imbalances in the world’s two largest economies will necessitate a sharp slowdown in global growth, and leads to several investment conclusions.