Bracing for headwinds

Macroeconomic update for November 2023

While the investor community continues to discuss the most probable timing of the arrival of a US recession, the surge in bond yields commanded the bulk of the attention in October. In the past, rising bond yields have often broken something on their way up – for example, the dot-com bubble burst or the euro crisis. The trouble is that predicting what will break and when is difficult.

We reiterate our recession scenario, expected in early 2024, and subsequent interest-rate cuts by the Federal Reserve. That’s because we believe the full impact of tighter lending standards and higher rates has yet to be felt, with consumer spending poised to deteriorate and businesses resorting to job cuts.

In October, the conflict in the Middle East fueled fears of an oil shock similar to the one in the 1970s, which eventually triggered the “Great Inflation” at the time. We believe the still weak global economy or the current restrictive monetary policy weigh more heavily and therefore do not expect a strong second wave of inflation.

We believe it’s best to remain cautious in our positioning and refrained from making any changes for now.

Key Takeaways

1. Surge in bond yields
   The issue with rising bond yields is that there’s often something that breaks on the way up. But it’s hard to predict what will break – and when.
2. US recession delay
   The most important reason for the delay is the still very robust US labor market. We still believe the full impact of tighter lending standards and higher rates has yet to be felt.
3. Oil market’s perfect storm
   The conflict in the Middle East exacerbated fears of an oil shock akin to that in the 1970s that triggered the “Great Inflation” at the time. We do not expect a strong second wave of inflation.

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