SUMMARY
China’s earlier-than-expected move to end its Covid-zero policy and indications that Europe’s energy shock is abating suggest the severity of a prospective global slowdown is lessening.
- This week we raised our global GDP forecasts for 2023 to +2.0% from +1.7%, while downgrading 2023 US growth estimates.
- Recent data suggest the Fed’s heavy-handed monetary policy is impacting a broader set of economic factors more deeply month over month. The sharp rise in consumer goods and new home inventories this past year are leading to reductions in construction, trade activity and industrial production.
- With short-term interest rates up more than 400 basis points over 10 months and asset prices suffering losses, consumer activity still appears OK. But residential housing contractions and slowing business investment will ultimately affect household spending. The decelerations associated with a pending recession are at work.
- Once unemployment starts to rise, it tends to keep rising until monetary policy eases and producers have cut “too much.” Only then can an upcycle begin.
- We see the Fed’s fixation on inflation and positive January employment data combining to revive the growth and inflation fears of 2022. A broad near-term rise in interest rates after an exceptional downward move is also possible.
- These changes in markets are why we have made our first small, preliminary changes to our asset allocation. We have sold our 2% gold position and reallocated it to buy European and Japanese equities and even more short-term US fixed income.
- Our enlarged bond position will be a future source of funds for even more global equities when a bottoming in the US economic cycle is closer at hand.
