In this issue:
- Financial markets mount a solid comeback on hopes of peaking interest rates and inflation
- A soft landing still possible for the US economy in 2023
- SA economy likely to tread water in 2023
- China slowing down but remains a bright spot in 2023
- US corporate earnings announcements
We entered 2023 with professional forecasters agreeing that inflation had peaked in most major markets, and the global economy was slowing. The bone of contention was on the pace of inflation deceleration and the extent of the economy’s slack. There were three narratives going around: goldilocks, mild recession, and stagflation. Those who projected a goldilocks outcome expected inflation to decline rapidly without kneecapping economic activity. Most of them predicted that central banks would pivot to reignite economic growth at some point in the year which will see risk assets recovering from last year’s dip.
Mild recession advocates argued that tighter monetary policy will slow inflation, but it will also lead to some slack in economic activity. Their assessment of the economy is consistent with Louis-Vincent Gave’s disinflationary bust. Most also predicted that central banks will slow down and pause interest rate hikes but leave rates at higher levels for long. The stagflation scenario on the other hand, would see central banks failing to reign in inflation unless demand collapsed. Thus, advocates for that outcome predicted that central banks will remain hawkish, but they will be forced to prioritise the economy at some point, leading to a protracted battle against inflation captioned by a drastic decline in global growth. This is the worst outcome for risk assets.
It is still too early to determine which of these macroeconomic scenarios will prove true, but a tussle between these beliefs was evident in financial markets for most of January. The goldilocks dominated. Markets started and ended in a buoyant mood, driven by China’s reopening, falling energy prices and slowing inflation. These developments raised hopes of a soft economic landing, and interest rate cuts. During the first two weeks, the S&P 500 rose 4.22%. Equities in Europe gained 8.17%. MSCI World gained 5.5%. Locally, the JSE rallied more than 6%. In the bond markets yields softened, meaning bond prices rose. The rally was disrupted towards the end of the month on growing caution at the start of central banks meetings and earnings anxiety. Nonetheless, the bulls ended in the money as most risk assets closed comfortably higher.