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Published on 05.12.2022

Macroeconomic update for December 2022

A recession is looming ever closer and becoming ever more apparent. Inflation should decline further and central banks should soon loosen their restrictive policies.

For the markets, these are not necessarily negative signals. We stay optimistic and maintain our overweight in equities, government bonds, and gold.


The monthly CIO update analyzes the current market environment and presents the backstories. Presenters are Dan Scott, Head Multi Asset, and Michaela Huber, Investment Strategist.

  

 

Four factors supporting our view

A recession has been on the horizon for a while and now it is getting more apparent. Four factors support this view:

  1. The US yield curve is strongly inverted—which is typically a reliable harbinger of a downturn.
  2. The purchasing managers’ indices have weakened further and are well below the 50-point line, suggesting a contraction. As these indices lag central bank policy by around 15 months, the economy is likely to cool even more going forward.
  3. The US Fed’s rate hikes so far have impacted rate-sensitive sectors, such as the housing market, with a slight delay. This is visible, for example, in the drop in house prices in the USA—the first since 2012. Lending standards have become stricter as well.
  4. The struggling Chinese economy is an additional burden on global growth.

These prognoses, of course, also influence inflation. Together with the restrictive monetary policy, the approaching recession indicates falling inflation. We expect lower demand-driven inflation, an ongoing normalization of global supply chains and lower prices for specific goods (example: leading indicators even suggest that used car prices might fall into deflation).

In addition, the signs point to a cooling US labor market. This eases wage pressure and keeps a lid on service prices.

Inflation, on the other hand, influences the central banks. These will probably turn significantly more dovish after the strong rate hikes over the last few months. In the past, the US Fed hiked above headline inflation before turning more supportive again. It’s quite possible that the hikes will stop in the first quarter of 2023.

A look back to the 1970s and 1980s shows that there were only one or two months between the last rate hike and the first rate cut. If now the unemployment rate ticks up, which we currently expect will happen, the Fed will probably react quickly.

From an investor’s viewpoint, a weakening economy is not necessarily bad when it comes to returns.
At Vontobel, we are maintaining our overweight in equities. We think that the market has already priced
a lot in. If rates do not rise any higher, or if they even come down, that would be a positive signal for the
equities market.

However, we believe 2023 will probably be, above all, a bond year. We already hold an overweight in government bonds. The current situation indicates a longer duration.

We are also sticking with our overweight in gold. Firstly, because it serves as insurance; plus, we expect a weaker USD, which historically bode well for the gold price.

  

 

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What to expect

  

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Investing in times of inflation

Find out which price index economists use to measure inflation and which asset classes and sectors have performed best in the past in an inflationary environment.

Yields in comparison (since 1973)

 

  

  

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