Newsletter
January 2023
Economic conditions
The moderation in economic activity that was seen at the start of 2022, easing of supply constraints and base effects from the year-on-year measurement of the inflation rate have been sufficient to remove immediate interest rate fears, This has improved the outlook for US and world economic growth.
Projections
| Indicator | 2022 | 2023 | 2024 | 2025 |
|---|---|---|---|---|
| World growth | 3.8 | 3.5 | 4.0 | 4.0 |
| US GDP | 4.0 | 3.5 | 3.0 | 2.5 |
| US Inflation | 2.5 | 3.5 | 3.0 | 2.0 |
| US Unemployment | 4.0 | 4.0 | 4.0 | 4.0 |
| US bond yield | 1.8 | 2.0 | 2.5 | 2.5 |
Upcoming events
US interest rates: US rate expectations have eased a little, with the removal of immediate inflation fears. However, robust economic growth allows central banks more scope to raise interest rates to calm asset prices. Fed officials stress a steady outlook with gradual rate increases and focus on the latest economic data.
Trade policy New Chinese-US trade negotiations are scheduled for the end of January. Biden has taken a tough stance. Some commentators are suggesting that the official position may soften when negotiations actually commence. The Chinese economy is recovering but remains fragile after the Chinese housing market collapse. This is a worry for investors in emerging equities (EEM).
US fiscal policy The loss of the House of Representatives to the Republicans in the Mid-Term elections removes the ability of the US Administration to supply additional fiscal stimulus. This may temper the need for aggressive monetary action.
International events Russian border transgressions in Ukraine have been met with additional sanctions for Russian banks and key Russian officials. Tensions remain high. The Taiwan Strait, the Middle East and Brazil are also potential flashpoints.
Assets
Stocks US (SPY) equities have benefited from the easing of concerns about inflation and the evidence that profit margins are holding firm. Emerging equities (EEM) were initially constrained in 2022 by the economic slowdown in China and the industrial conflict in Brazil. However, worries about the Chinese property market have eased, the government is relaxing the strict virus containment policy and the Chinese economy and emerging equities (EEM) have finished the year on a stronger note. Monetary normalisation is in place. Other central banks are also raising interest rates.
Bonds Easing inflation fear has helped US government bonds (TLT) in the early part of 2022. However, the prospect of tightening monetary conditions have caused lower prices and higher yields in the second half. The spread between corporate bonds and safer government assets increased in the first few months of 2022, with some warnings about the difficulties that some firms were facing refinancing their debt but the spread has pulled back in the second half as they warnings proved to be unfounded. Refinancing is happening, funding costs are low and the level of defaults is limited.
Gold (GLD) prices have been relatively stable, supported in the middle of the year by military tensions in Europe and the Taiwan strait as well as lower Crypto prices. These military tensions have eased towards year end with just another round of economic sanctions.