Asset Management: Monthly Macro Insights - November 2023

The last few months have seen global consumer confidence dip back to still-depressed levels, while business confidence has weakened in most countries. Still, investors remain somewhat optimistic as they foresee the resilience of the global economy amid the end of the monetary tightening.

More divergences in Q3-23…

In China, GDP grew 1.3 per cent quarter-on-quarter (q/q), an improvement from the weak 0.5 per cent in Q2, but still significantly lagging the pre-pandemic trend. Domestic demand improved somewhat, but the low level of inflation, hovering around 0 per cent in the past few months, suggests that the economic slack remains significant.

Although the economy is not falling off a cliff, Eurozone GDP nonetheless fell -0.1 per cent q/q amid higher interest rates, slowing external demand and the lingering impacts of the energy price shock.

… but the US’ outperformance will be tested

In sharp contrast, US GDP surged 1.2 per cent q/q – or 4.9 per cent q/q annualised – the fastest pace since 2021. However, the US’ outperformance was driven in large part by temporary factors that are unlikely to be repeated and the strength of the consumer will be increasingly tested by elevated borrowing costs, tighter access to credit and the recent resumption of student-loan payments.

Higher bond yields spooked central banks…

The recent rise in global sovereign yields can be explained in part by the “higher for longer”, as central banks have insisted monetary policy would remain tight for some time. It can also be explained by risks regarding public finances and debt sustainability as interest payments are expected to surge in the next few years, as well as uncertainty regarding inflation volatility in the next few years. Correspondingly, investors are demanding a higher term premium. This trend has several repercussions, especially in the US.

The Fed acknowledged rates might not be sufficiently restrictive for inflation to move back to target. That said, while it left the door open to another increase after pausing for the second meeting in a row, Fed Chair Powell hinted that tighter financial conditions in general, and a run-up in Treasury yields in particular, reduced the impetus to tighten policy further as it will likely weigh on economic activity. Ironically, the move following Powell’s remarks might force the Fed to go back to its hiking campaign as the fight against inflation is far from over.

… but inflation still requires vigilance

In most countries, there has been a continued decline in inflation, and investors expect that inflation dynamics will converge seamlessly towards the respective central bank targets. A large part of the disinflation was driven by the decline in commodity prices in the later part of 2022, especially energy, and by the significant improvement in supply chain disruptions. In contrast, core inflation has been more stubborn as services inflation has tended to move lower only gradually.

Admittedly, commodity price shocks mainly affect relative prices rather than overall inflation, explaining why central banks usually look through them. But at a time when inflation has been high for long, some central banks may need to proceed with greater caution to prevent inflation from getting entrenched.

Read the full version of Monthly Macro Insights - November 2023

by Marc-Antoine Collard, Chief Economist and Head of Economic Research

Read more articles

  • Abolishing 'non-dom' status - what you need to know

    Insights

    The existing ‘non-dom’ tax regime will be abolished in April 2025. The impact on your finances depends on your existing status and how long you have held it, but non-doms should be reviewing their position now and forming a strategy for the future.

  • The next mood shift

    Market Perspective

    Despite geopolitical tensions and shifting expectations of interest rate cuts, financial markets have been remarkably resilient. In this Market Perspective, we discuss the 'higher for longer' monetary policy and assess the importance of mounting US government debt.

  • Understanding sustainability risks and opportunities

    Insights

    Investing is not just about choosing companies that we expect to achieve success in the short term. It’s important to find businesses which can adapt to a changing world and are part of shaping the future. In this article we explore the risks and opportunities they face.

  • Should I form a trust?

    Insights

    Trusts can be an effective way to provide for your family while retaining control, but you must balance the advantages against the administrative and financial costs. In this article we examine the pros and cons of setting up a trust, and potential pitfalls to avoid.

  • The defence debate

    Strategy Blog

    The events of the last couple of years have dramatically increased the geopolitical temperature, shifting the political discourse in favour of security. In this blog we examine the evolving nature of defence and military equipment, and what it could mean for investors.

  • The last mile

    Perspectives podcast

    The Swiss National Bank's decision to reduce interest rates came as a surprise to the market. Join our Global Investment Strategists to decode central banks' moves, unravel oil market dynamics, and track gold and bitcoin prices.

Back to top