inflation

Market expectations of central bank interest rate cuts in 2024 are reasonable, according to Gilles Moëc, the Axa group chief economist and Axa IM head of research, who presented Axa’s outlook for next year in Luxembourg this week. He painted a relatively rosy picture for the US and, to a lesser extent, stagnating Europe, pointing to evidence that inflation is finally under control and that political troubles are not yet certain.

Long-term inflation expectations have risen this year.

There you are with all those fancy indicators like yield curves, ISM Manufacturing, and housing markets. They all point in the same direction, down! But the incoming US macro numbers are in no way pointing to a recession, nor to a soft landing. Spend it!

With economic growth slowing down in all three of the world’s major economies, investors are best advised to opt for the geographical region with the least messy outlook, leading international economist Mohammed El-Erian has told a Nordic conference. “The cleanest dirty shirt is in the US.”

Uncertainty regarding monetary policy, inflation, and the pace at which the climate crisis is worsening are known factors that will determine the shape of investment charts in 2023. On top of that, the risk exists that an unexpected event will leave its mark. Investment Officer’s experts and columnists are clear in their expectations for this year. “The list of tough questions for 2023 is long.”

No, this is not a column about the Netherlands’ performance at the World Cup. Although, of course, the title fits this seamlessly. This column is about China and its Covid issues.

Europe should not count on a traditional economic recovery. Due to second-round effects, inflation will widen further by 2023. And, ING chief economist Carsten Brzeski says, don’t count on gas prices coming down either. Nay, on the contrary, the real energy crisis will come next year. 

The future has never been more uncertain, and that has more to do with the climate than the business cycle, argues Paul De Grauwe, one of Belgium’s top economists. “Not inflation, but climate is the biggest challenge we face today,” he said. “The entire market system could perish.”

Have financial markets reached a bottom yet? Or is there more room on the downside? Investors, keen to find out how close to the bottom markets are, will be looking at Frankfurt on Thursday where the European Central Bank will again shed its lights on efforts to bring inflation under control. Will ECB President Christine Lagarde’s comments hold clues on where markets might move next?

The big difference between bonds and equities is that cash flows in bonds are fixed in advance. It makes inflation the great enemy of bonds. With equities, the effect of inflation is more complex. Companies that raise prices often realise higher sales as a result. But with a lag, inflation, in the form of rising wages and rising interest rates, creates margin pressure, as do rising energy prices.