Inflation/Deflation
We measure the effects of inflation and growth cycles on the returns of various assets using the four-quadrant approach, where we classify periods into the following buckets: Slowing inflation/slowing growth (slowdown), rising growth/slowing inflation (goldilocks), rising growth/rising inflation (overheating), and slowing growth/rising inflation (stagflation). Our analysis provides insight into the coming macro environment. As growth and inflation begin to decline, the best choices for asset allocators will be fixed income, precious metals, CTAs and timberland.
The crucial question for 2023 is: will the US and UK Beveridge Curves shift back inwards to their pre-pandemic versions, ushering in a soft landing? Or, will we slide down the new post-pandemic Beveridge Curves into recession? Plus: we reveal the most important chart for Europe and the most important chart for China in early 2023.
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.
This digest version of our Special Report contains its conclusion along with a high-level review of how we reached it. It is structured identically to the full document, but with less than half the word count, so a reader can swiftly absorb the punch line while easily moving between the versions to zoom in on the details most relevant to his/her process.
Workers have a cyclical wind at their backs as labor demand exceeds supply, but a wage-price spiral is no more than a remote possibility. The structural backdrop has turned significantly against them since the last bout of high inflation 40-plus years ago and they are no longer price makers.
Relative to beaten-down expectations, global growth will surprise on the upside in 2023. Investors should overweight equities for now but look to turn more defensive in the second half of the year.
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.
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.