This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
2023 Annual Outlook
Wells Fargo Economics
Dec. 8: The pandemic and the associated macroeconomic policy response imparted outsize imbalances to many economies. How households, businesses, and policy makers respond to the trade-offs they face will determine 2023 economic performance.
Surging demand with constrained supply has caused inflation in the United States to shoot up to its highest rate in decades. The Federal Reserve now faces an unpleasant dilemma: The FOMC needs to raise rates further to ensure that inflation recedes back toward target, but excessive tightening could lead to recession.
We believe the FOMC will err on the side of bringing down inflation at the expense of a U.S. economic downturn in 2023. Central banks in many foreign economies face the same dilemma, and we look for foreign central bankers to choose inflation reduction. Consequently, many foreign economies will be in recession in 2023.
The U.S. dollar has strengthened vis-à-vis most foreign currencies, and we look for this trend to continue early next year. But as market participants begin to anticipate policy easing in the U.S., the greenback will trend lower, beginning in mid-2023.
Jay H. Bryson, Sarah House, Brendan McKenna, and Charlie Dougherty
Will Relief Arrive in 2023?
Monthly Fixed Income Monitor
National Bank of Canada Financial Markets
December: As we close the book on an extraordinary year, the economic and financial market backdrop couldn’t be any different than it was a year ago. Monetary policy, which at this time last year was ultra-accommodative, has tightened significantly. Central banks, motivated by the threat of entrenched above-target inflation, quickly pivoted to the most restrictive settings in over a decade.
But while inflation was the theme in 2022, we believe that 2023 will be a year of relief—in terms of consumer price inflation, labor market tightness, and ultimately policy-rate settings. Our expectation remains that Fed rate cuts will be appropriate by the end of 2023, despite the FOMC’s best efforts to signal otherwise. This creates scope for a significant fall in short-term interest rates. Twelve months from now, we could see two-year Treasury yields down 100 basis points [one percentage point] from current levels. By year-end 2023, we should see a yield curve that is far less inverted.
All told, assuming a soft-ish landing (our base-case view), credit markets may benefit in the back half of next year. Again, that’s predicated on major inflation relief, allowing the Fed (and ultimately the Bank of Canada) to turn the dial down on policy rates.
Taylor Schleich and Warren Lovely
Todd Market Forecast
Dec. 7: Stocks: The market was just moribund today. Very little movement. It must have looked like a wax museum on the floor of the exchange. The
index closed below the Nov. 29 low, in spite of dropping rates. This gives us a short-term sell, but we’re suspicious. We’re almost oversold, and the put/call ratio was very high today. Also don’t forget positive seasonality. A solid rebound probably would reinstate a short-term buy call.
The market has been dropping largely because some commentators are predicting a recession. They point to the sharp decline in crude oil in spite of rumblings of reopening in China. Crude has been dropping, but it’s back at the September lows that arrested the last decline. [Our latest market stances]: Bonds: bullish as of Oct. 25. Dollar: bearish as of Sept. 28. Euro: bullish as of Sept. 28. Gold: bearish as of Dec. 5. Silver: bearish as of Dec. 5. Crude Oil: bearish as of Nov. 17. Toronto Stocks: bullish as of Oct. 3.
What Another Indicator Is Saying
Palumbo Wealth Management
Dec. 2: There have been nine U.S. recessions since 1960, and an inversion of the yield curve preceded the start of each of them. The yield curve is currently inverted (in fact, very inverted), so there is concern that another recession is about to begin.
We always look to verify trends with other data. One such piece of data is the Weekly Economic Index from the New York Fed, which tracks 10 weekly and daily data points: initial unemployment insurance claims, continuing unemployment insurance claims, federal taxes withheld, Redbook same-store sales, the Rasmussen Consumer Index, the American Staffing Association Staffing Index, raw-steel production, U.S. railroad traffic, U.S. fuel sales to end users, and U.S. electricity output.
The index is now back where it was before the pandemic, but the trend remains firmly down. If this continues, indications of a recession will become much clearer.
Signs of a Slowdown
The Economic Outlook
December: There were, as of October, 10.334 million open jobs across the U.S. Though down from the peak of 11.855 million reached in March, this is still roughly 48% higher than the number prior to the onset of the pandemic.
This translates into 1.7 open jobs for each unemployed person—which, while down from a peak of 2.0 in March, is still far above the ratio prior to the pandemic. Even if we expand the pool of potential workers to include those not currently in the labor force who nonetheless state that they want a job, this translates into 0.9 of an open job, once again well above the ratio prior to the pandemic.
We expect labor market conditions to loosen further in the months ahead. [The situation that produces] will, however, likely look different than has been the case in past cycles, in which layoffs would have been a more prominent component than we expect in this cycle. Even so, slower job and wage growth and further cuts in hours worked will take a toll on growth in personal income and, in turn, on consumer spending. This is one reason we expect only weak growth in private domestic demand in 2023.
Richard F. Moody
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