September 15, 2022
Q4 Global Macro Outlook
Set against a backdrop of slowing growth, elevated inflation, and negative investor sentiment, global markets have spent the past quarter pricing in an increasingly hawkish profile for central bank rate hikes, leading to a sharp spike in volatility across asset classes. We take a closer look at macro trends that are likely to shape the trading environment in the coming months.
A difficult climb ahead
Much of current market commentary seems overly focused on whether the global economy or a specific region will slip into recession. We’ve always felt that such a binary “will it, won’t it” framing isn’t helpful. In our view, what’s more important is how quickly we’re likely to enter a period of very slow growth and how long it will last. Crucially, stagflationary dynamics—which have been amplified by Russia’s invasion of Ukraine—remain at play and make for a challenging backdrop for risk assets.
Macro anchors that could shape Q4
Investors hoping for a return of Goldilocks-like trading conditions are likely to find themselves disappointed in the coming months. Few would dispute that the global growth picture—which will be reflected in the trading environment—seems set to deteriorate through the rest of 2022 and remain weak in the first half of 2023. We've identified key macro anchors that we believe will influence market behavior in the coming months.
Slowing growth in China
We continue to have concerns about China’s economy. The economic costs of the country’s dynamic zero-COVID policy mount as the fear of additional large-scale lockdowns persists. This could signify further disruptions to supply even as China’s property sector continues to deteriorate. Slowing global growth would also likely mean a reduction in global appetite for Chinese exports. These are all nonnegligible headwinds to growth. Crucially, policy support remains underwhelming relative to the scale of the economic challenges that the economy faces.
Prices likely to remain elevated
Inflationary pressures should unwind gradually over the coming months, but they're likely to remain at elevated levels through the rest of 2022 and into next year. We expect headline Consumer Price Index (CPI) readings to begin to diverge from Core CPI readings: Food and energy prices are likely to remain high, but more interest-rate-sensitive items should begin to display signs of disinflation. We expect inflation to have materially decelerated by the middle of 2023 on the back of base effects kicking in, an expected buildup in excess inventories in non-auto retail goods, and the alleviation of supply chain disruptions.
Central bank tightening vs. growth
Global central bank tightening in both developed and emerging markets will contribute to deteriorating global liquidity conditions and act as a headwind to growth. While we initially expected central banks to shift their focus from tamping down inflation to addressing growth-related concerns later this year as economic data worsened, obstinately high inflation readings gave most central banks little choice but to continue raising rates despite slowing growth, thereby amplifying recessionary dynamics.
Staying focused amid uncertainty
The way we see it, the prognosis is clear: We’re entering a challenging period for risk markets, in the short term at least. The broader geopolitical environment doesn’t help, as two important events—the Chinese Communist Party Congress in October and the U.S. mid-term elections in late 2022—will no doubt dominate market chatter. In times like these, it’s important to consider enhancing portfolio resilience. While it’s true that opportunities can emerge in times of uncertainty and volatility, it’s just as important for investors to cut through the white noise in the near term and train their goals on the longer term.
Global Macro Outlook: a difficult climb ahead
A closer look at macro trends that are likely to shape the trading environment in the coming months
Previous editions of Global Macro Outlook
August 25, 2022
March 8, 2022
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