#109 – What’s after inflation?

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#109 – What’s after inflation?

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After Inflation – In this article you’ll find:

  • Let’s see how much the markets are pricing the peak of interest rates and when
  • Why inflation is still high in relative historical terms, even if rates are slowing.
  • How long the federal funds rate could stay at its peak
  • And what we could expect by US or International Stocks in 2023?

Here you can find other articles:

  1. The Deeper The Recession, The Deeper The Earnings Decline Will Be. Even in China?
  2. 2023? Implications For Profits And Equity Markets
  3. How Will Be The Future’s Hotels?




Inflation trends are moving in a favorable direction, but the change is likely to slow for the Fed to take its foot off the brake anytime soon.

While a pivot to rate cuts does not seem likely in the near term, central banks seem to be signaling a step down in the size of rate hikes, and in some cases, even a pause.

The U.S. Federal Reserve has slowed the pace of rate hikes from 75 basis points (bps) in November to 50 bps in December.

That follows the Bank of Canada stepping down from 75 bps in late October to 50 bps in December and saying it would consider “whether the policy interest rate needs to rise further.”

The central banks of Australia and Norway stepped down from 50 bps to 25 bps at their meetings back in October/November and repeating 25 bp hikes in December.

The central bank of one of the largest emerging-market economies, Brazil, along with the central bank for the largest emerging-market economy in Europe, Poland, both paused a few months ago, leaving rates unchanged at recent meetings.

Inflation signals remain noisy, clouding the picture

Even after a year of inflation rates not seen since the 1980s, prominent economists cannot agree on the seriousness of the challenge.

Needless to say, this lack of clarity complicates the policy response, as does the uncertain lag between policy action and economic outcomes.

Average hourly earnings grew 5.1%

As we turn to 2023, the story for the U.S. economy will likely shift focus from inflationary concerns to potential stresses in the broader economy and labor market.

To be sure, inflation is still high in relative historical terms, even if rates are slowing. And wage growth is proving too stubborn for a Fed keen on holding down inflation expectations.

Average hourly earnings grew 5.1% from a year earlier in November, according to the most recent jobs report, and the annualized gain over the prior three months (which is a better gauge of the near-term trend) was the fastest since January.


The Atlanta Federal Reserve bank’s wage growth tracker corroborated the trend, showing headline growth of 6.4% in November, with both job switchers and job stayers seeing gains, as shown in the chart above.

How long the federal funds rate could stay at its peak

Past cycles don’t necessarily provide clear guidance around how long the federal funds rate could stay at its peak.

The Fed has held it at the peak level for as little as three months, or as long as 18 months.

Notably, cycles in the high-inflation era of the early 1980s tended to be shorter, although yields started at very high levels.

The equal-weighted S&P 500 Index has outperformed its market capitalization-weighted peer by its largest margin since 2010


Charles Schwab makes valuable insights and take ahead great analysis, like this one.

With a hawkish Fed intending to keep rates higher for longer, the return of a higher risk-free rate has important implications for stock investors.

Not only are stock fundamentals coming back into play courtesy of higher rates and economic weakness, but the market’s leadership profile is decisively shifting.

Gone are the days when the market’s gains depended on the performance of just a handful of stocks (i.e., the “big five” or the “super seven”).

As shown in the chart above, the equal-weighted S&P 500 Index has outperformed its market capitalization-weighted peer by its largest margin since 2010.

What’s after inflation?

If central banks overcome inflation in 2023, the next big challenge for borrowers will be weak demand and residual high costs.

There will be hard choices to make on the macroeconomic front

S&P Global Ratings expect inflation fighting by central banks to take precedence, given their mandates. However, the ECB looks set to normalize monetary policy only gradually over multiple years to maintain the eurozone’s financial stability.

Compared with developed markets, the head start by EM central banks will help with trade-offs. That said, EMs are exposed to the stronger U.S. dollar.

About 81% of rated EM corporates’ debt maturing through 2023 is denominated in U.S. dollars.

As global growth slows, why is the right mix of monetary and fiscal policy important?

Monetary and fiscal policy should work in tandem for the best macro-outcomes. But that’s a dilemma amid low growth (calling for loose fiscal policy) and high inflation (needing a tight monetary stance).

Productivity sags as labor costs spike


The Fed is likely still far from declaring victory on the inflation front.

Stronger wage growth goes hand-in-hand with higher unit labor costs, which are in turn highly correlated with inflation.

As you can see in the chart above, the two-year percentage change in unit labor costs rose to 11.2% in the third quarter, the fastest since the early 1980s.

Such gains don’t mean workers are getting more productive, either: Productivity’s 1.4% drop was the worst since 1975.

US or International Stocks in 2023?

Charles Schwab and I’m agree with them that International Stocks is poised to outperform the US stocks even in 2023.

The outperformance by international stocks may continue in 2023.

International stocks tend to possess more of the characteristics, like high dividend yields and lower price-to-cash-flow ratios, that have contributed to outperformance within and across sectors and countries this year.

Earnings growth is also stronger outside the United States, and analysts expect it to remain so in 2023.

The year-over-year growth earnings growth for S&P 500 companies in the recently reported third quarter was 4.1%, compared to 30.5% for companies in Europe’s STOXX 600 Index.

Combined with lower valuations, this has supported international stock outperformance, which may become more pronounced with a pause or reversal in the sharp rise of the dollar that characterized much of 2022.

Join the conversation with your own take on these topics in the comments below.

About the Author

Alessandro is a Financial Markets enthusiastic and he loves learning from articles/papers on many financial topics.

In doing so he shares with you the most interesting charts and comments.


This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. 

It has been prepared for informational purposes only. 

Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

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