Sailing in 2023 with seven maps and a cat


Comment

Investors had a hard time last year. Creeping inflation was fought as central banks rushed to raise official interest rates, trashing yields in nearly every asset class except gold and other commodities. The key for financial markets in the coming year will be whether policymakers can engineer a soft landing for the global economy or whether recession becomes endemic. Given how badly the guardians of monetary stability have misjudged the post-pandemic environment, we are skeptical of their ability to cook up a Goldilocks economy. Too much tightening risks serving as cold economic porridge as growth becomes moribund.

Is the bond trend coming to an end?

Since the 1980s, yields on debt have steadily fallen. This decades-long downtrend has clearly been broken, with the average 10-year yield in G-7 bond markets more than doubling last year from the decade-long average of 1.3%. At current levels, borrowing costs in the debt market are in line with their 20-year average. Your guess is as bad as ours as to what will happen next in fixed income.

Overly generous monetary and fiscal stimulus during the pandemic has led to runaway inflation – kryptonite for bonds. US yields, the global benchmark, led the way to significantly higher levels. The consensus forecast from economists polled by Bloomberg is for 10-year Treasuries to sit at 3.5% by the end of 2023, little change from the current level of around 3.85%. This seems unlikely to us; either the transitory team prevails and yields fall, or increased friction in global trade keeps consumer prices and bond yields higher.

Inflation, inflation everywhere

The post-pandemic consumer price spike has affected every economy in the world, including goods and services. And there is no end in sight yet.

Global inflation had slowed to nearly 2% at the start of 2021. But gargantuan pandemic stimulus programs have combined with an energy shock following Russia’s invasion of Ukraine and the logistical nightmare of supply chain lockdowns. supply to produce a five-fold increase in consumer prices. While the pace of key rate hikes by central banks could moderate in the coming months, the mopping-up operation is far from over. This gets even trickier as the International Monetary Fund estimates that a third of the world’s economies are either in recession or on the verge of it. Stagflation seems the most likely outcome, at least for the first part of this year.

I have to, I have to, so to work I go

Overly hot pay rises are keeping central bankers up at night. This is how inflation expectations become part of economic behavior. It is devilishly difficult to prevent a self-perpetuating spiral, where the rising cost of living leads to ever-higher demands for salary improvements.

The average hourly wage can, in normal times, be comfortably a little above the Federal Reserve’s 2% inflation target. But the number has been running at more than 5% for more than a year. Until this crucial step is brought under control, the Fed will not be able to resist raising interest rates. Since the US central bank effectively dictates how high global interest rates will have to rise, the economic indicator to watch for 2023 will be US labor market data, particularly on wages.

Navigation news is getting better

The cost of transporting goods around the world is almost back to pre-pandemic levels, having fallen 80% from its peak in September 2021. This provides a welcome logistical respite from supply chains and pressure inflation that accompanies it.

Much of the retracement is due to port delays which ultimately reduced and improved transit times. The broader economic picture, however, is also less favorable, with the delayed reopening of the Chinese economy after the shutdowns and the looming threat of recession in many parts of the world. In the longer term, the growing trend of de-globalization, with increased relocation of manufacturing facilities to the West, could lead to reduced trade with Asia.

The universe of negative-yielding bonds dwindled as the bandwagon of rising interest rates gathered pace. Its peak in early 2021 saw more than $18 trillion in debt offering sub-zero rates. It’s now a much more modest $1.1 trillion as the financial world returns to something closer to normal as the era of Alice Through the Looking Glass to get paid to borrow is finally ending.

The main providers of negative-yielding debt in recent years have been the core eurozone countries and Japan, with Switzerland playing a minor supporting role. Negative rates in the Eurozone are now a thing of the past, even on shorter-maturity debt, as the European Central Bank belatedly joined in the rush to raise borrowing costs. German and French 10-year yields currently sit at around 2.5% and 3%, respectively, a significant jump from zero a year ago. Japan remains the exception, due to its persistence in controlling the yield curve to prevent its 10-year yield from breaching its recently revised ceiling of 0.5%. As a result, with the official Bank of Japan rate still minus 0.1%, only a handful of Japanese government bonds are still yielding less than zero.

That number — $96.6 trillion — is the current global market capitalization, down from its November 17, 2021 peak of $122.5 trillion. This year’s 20% drop is the worst since the 47% drop in 2008.

A Bloomberg News survey of 134 fund managers, including BlackRock Inc., Goldman Sachs Asset Management and Amundi SA, suggests investors expect a 10% rebound in global equities this year. But 48% of participants said equities could again be hurt by stubbornly high inflation, while 45% cited a deep recession as a concern. To summarize: ¯_(ツ)_/¯

In August, a tech startup in London called Stability AI made an image generation template available for general use. Here’s how he interpreted our request to portray a blue English shorthair cat playing the guitar (look at those shoulders and hands; scary doesn’t really cover it):

A few weeks ago, ChatGPT, a text-generating system from OpenAI based in San Francisco, took the internet by storm with its ability to write screenplays, poetry, limericks, and even computer code. Artificial intelligence and machine learning should provide us with more routes in the Strange Valley in the coming months. Maybe someone will come up with a bot that is better at forecasting the economy than central bank models.

Bitcoin’s corpse is still shaking

“A crook’s paradise or digital gold?” we wrote a year ago about the world of cryptocurrencies. “Ponzi schemes or the future of money? The coming year will decide. The collapse of digital exchange FTX, the arrest of Sam Bankman-Fried for fraud, and the concomitant evaporation of billions of real dollars have, in our view, resolved the question on the side of the skeptics. Bitcoin, first among equals for laser enthusiasts, languishes below $17,000, having peaked near $70,000 just over a year ago.

The blockchain technology that underpins decentralized finance remains a solution in search of a problem. The Australian exchange recently abandoned a multi-year effort to move to a distributed ledger platform, writing off about $170 million; AP Moller-Maersk A/S and International Business Machines Corp. dropped a shipping blockchain project called TradeLens that aimed to track goods on ships. Bitcoin’s corpse is still shaking, but we’re with JPMorgan Chase & Co.’s Jamie Dimon: “Pet rocks” was how he described crypto tokens last month.

More from Bloomberg Opinion:

• Cathie Wood may be right that Jay Powell is wrong: Robert Burgess

• The inverted yield curve has something for everyone: Conor Sen

• The Fed should not raise its inflation target: Bill Dudley

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. Previously, he was Chief Market Strategist for Haitong Securities in London.

Mark Gilbert is a Bloomberg Opinion columnist covering asset management. A former London bureau chief of Bloomberg News, he is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”

More stories like this are available at bloomberg.com/opinion