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Figurines are seen in front of displayed stock graph and word "Inflation" in this illustration taken June 13, 2022. REUTERS/Dado Ruvic/Illustration

Economic outlook rather gloomy, but bright spots in terms of inflation

 

The outlook for Q1/2023 remains bleak: rising prices and interest rates are weighing on the global economy. Add to this the problems in China. On the other hand, the inflation rate has already peaked or is about to peak. As far as bonds are concerned, this means an easing on both sides of the Atlantic. “Even if yields on long-dated bonds have a certain potential for another setback after the recent rally, we expect at least stable yields for 2023 in the worst case”, says Carsten Gerlinger, Managing Director and Head of Asset Management at Moventum AM at Moventum’s Asset Allocation Conference. Equity markets are being held back by falling profits and the threat of a recession. “In selected sectors, however, we continue to see potential.“

Despite sentiment indicators brightening recently, a recession remains likely in the first half of 2023 with Europe being more affected than the US. Inflation and higher interest rates will have negative impacts, which will be amplified by second-round effects: in the US by rising wages and in Europe by the consequences of the high energy prices. “In the first quarter of 2023, a more restrictive central bank policy is expected to continue”, Gerlinger points out, “although the effects of interest rate hikes will only become visible with a time lag.” High energy prices are also set to depress consumption. China is unable to offer sustained impetus to the global economy due to its real property crisis and hesitant corona easing. The supply chain problem remains unresolved, even if individual tensions seem to be easing.

There are, however, signs of an easing in the price trend: Core inflation in the US fell more strongly than expected recently, and the overall inflation rate declined for the fourth time in a row. “For the Eurozone, we expect inflation to peak in the first quarter of 2023”, says Gerlinger. While inflation overall is declining, central banks’ inflation targets of around two per cent are not achievable. In the medium term, rates of four to five per cent seem more likely.

Fundamentally, the US dollar remains significantly overvalued. “Initially, the restrictive US Federal Reserve policy is expected to continue, before a further slight weakening of the dollar in the environment of weakening US inflation data”, Gerlinger mentions. Ten-year US government bonds have shown to be very volatile recently. Yields reached 4.25 per cent, but were falling back to 3.74 per cent at the end of November. The long end remains caught between high inflation and a threatening recession. The short end is driven by Fed policy. Despite key interest rate hikes, yields on ten-year Eurobonds recently fell, particularly in the periphery, as a recession is expected.

“On the equity side, we rely on a balanced mix”, says Gerlinger. The recent development of the European stock market in particular, specifically the German stock market, showed how unpredictable the markets are: despite the very negative sentiment and the prospect of a recession, shares recently performed above average in Germany. “Apparently, many investors in this region were underinvested and got caught on the wrong foot”, Gerlinger explains.