After blowing the heat in November, the Central Banks, without much coherence, blow the cold in December, postponing by a few months the hope of a stabilization and then a reduction in interest rates.
And yet, the latest inflation figure in the United States clearly showed that the peak of price increases had passed. Base effects on raw materials are now favourable, contributing to this deceleration. But the Federal Reserve believes that the U.S. economy is still too resilient and that persistent labor market pressures make it impossible to stabilize wages to date. The 2% inflation target is still too far away and does not justify a change in monetary policy. The Federal Reserve is therefore undermining investors’ hopes that the rate hike cycle will end soon. Logically, US long-term rates have resumed their rise and equities have fallen.
In Europe, Christine Lagarde also adopts a very offensive tone, far from recent market expectations. It reiterates its willingness to fight inflation and warns the financial community that this fight will continue well into 2023. Two rate hikes of 50 basis points are already planned for February and March 2023. The economic situation in Europe is uneven across countries, but the greater-than-expected resilience of growth allows for this unexpected turnaround.
The speeches of the monetary authorities remain very contradictory from one month to the next. Communication error? Misdiagnosis? Whatever the reasons, only the outcome takes precedence and the markets are only reacting to these developments in speeches. Hence an accumulation of false starts followed by harrowing relapses.
This latest episode closes a difficult 2022, marked by the return of inflation forgotten for decades and by a sharp and rapid rise in rates. The year has also seen covid strongly disrupt the Chinese economy, caught in the vice of its crazy zero covid policy. The country’s recent decision to move away from this highly impactful dogma is good news for the economy, but also for global inflation. Prices have been fuelled in part by the disruption of supply chains caused by this health policy. China is also seeking to revive its economy by pursuing monetary and fiscal policies that are in contrast to its major competitors.
The interest rate shock we experienced in 2022 led to significant corrections on all risky assets: stocks, bonds, currencies, gold…The good growth values have suffered the consequences of monetary policies by marking heavy falls despite often solid results. They have therefore undergone an unprecedented downgrade and are now returning to attractive valuations. The likely downward revision of 2023 profits for most companies is, in part, already in prices, especially in Europe where the market price is below its historical average.
These factors represent necessary but not yet sufficient initial hopes for 2023. Interest rates will remain the main catalyst for bond and equity[1] markets in the short term. The responsibility of the Central Banks is therefore important and we hope that they will show more consistency in the coming months.
We have not changed our allocations for a month, maintaining a slight underweight in risky assets on moderate and balanced management and greater neutrality on our dynamic management. We are still suffering from our former position on growth stocks but we remain convinced of their return to grace in 2023. We find potential in short bond investments whose return is now profitable.
