What’s after inflation?
🎧💡 #19 Macro & Business Insights
Hi all, and welcome back to The Macro & Business Insights!
What you’ll find in this episode:
Let’s see how much the markets are pricing the peak of interest rates and when.
How long the federal funds rate could stay at its peak.
And what we could expect by US or International Stocks in 2023?
Inflation trends are moving in a favorable direction, but the change is likely to slow for the Fed to take its foot off the brake anytime soon.
While a pivot to rate cuts does not seem likely in the near term, central banks seem to be signaling a step down in the size of rate hikes, and in some cases, even a pause.
The U.S. Federal Reserve has slowed the pace of rate hikes from 75 basis points (bps) in November to 50 bps in December.
Inflation signals remain noisy, clouding the picture
Even after a year of inflation rates not seen since the 1980s, prominent economists cannot agree on the seriousness of the challenge.
Some think policymakers are raising rates too quickly, while others think that policymakers will need to do more than what is currently priced in markets.
Needless to say, this lack of clarity complicates the policy response, as does the uncertain lag between policy action and economic outcomes.
How long the federal funds rate could stay at its peak
Past cycles don't necessarily provide clear guidance around how long the federal funds rate could stay at its peak.
The Fed has held it at the peak level for as little as three months, or as long as 18 months.
Notably, cycles in the high-inflation era of the early 1980s tended to be shorter, although yields started at very high levels.
There will be hard choices to make on the macroeconomic front
S&P Global Ratings expect inflation fighting by central banks to take precedence, given their mandates.
However, the ECB looks set to normalize monetary policy only gradually over multiple years to maintain the eurozone's financial stability.
Compared with developed markets, the head start by EM central banks will help with trade-offs. That said, EMs are exposed to the stronger U.S. dollar.
US or International Stocks in 2023?
Charles Schwab and I’m agree with them that International Stocks is poised to outperform the US stocks even in 2023.
The outperformance by international stocks may continue in 2023. International stocks tend to possess more of the characteristics, like high dividend yields and lower price-to-cash-flow ratios, that have contributed to out performance within and across sectors and countries this year.
Earnings growth is also stronger outside the United States, and analysts expect it to remain so in 2023.
The year-over-year growth earnings growth for S&P 500 companies in the recently reported third quarter was 4.1%, compared to 30.5% for companies in Europe's STOXX 600 Index.
Combined with lower valuations, this has supported international stock out performance, which may become more pronounced with a pause or reversal in the sharp rise of the dollar that characterized much of 2022.
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Disclosure
This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. This material has been prepared for informational purposes only. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.