Dear Investors,
Pictet Wealth Management – Is soft landing possible yet?
“Recent economic strength has meaningfully lifted markets’ expectation of a soft landing.”
“The current expansion could go on longer than expected – estimates of excess savings and buffers to balance sheets are subject to a wide uncertainty band.”
“If consumers and businesses feel more upbeat about the outlook, savings could be tapped further than typically seen during previous cycles.”
“There is also a path to-wards a soft landing that involves supply side improvements, including a more significant increase in labor supply, or a more rapid pickup in productivity.”
What does fomc think about rates cut?
“The FOMC is on track to leave rates unchanged in September and recent signs of disinflation and moderating job gains raise the odds of 5.25-5.50% being the terminal rate.”
“Guidance will remain hawkish to prevent aggressive cuts pricing, but political pressures next year could mount for the central bank to ease policy at the first sign of economic weakness.”
“Looking ahead, with an expected growth contraction in H1 and decelerating inflation, we expect the Fed to start cutting policy rates at the end of Q2 2024, with a cumulative 150bps of cuts through year end.”
“Importantly, long-run inflation expectations have remained well anchored through-out the whole inflation spike, and the FOMC could be patient in the last mile of the inflation fight.”
“We don’t expect the Fed to change its inflation target, but it doesn’t have to risk a sharp demand slowdown to return inflation to 2% quickly.”
“In fact, the median FOMC participant doesn’t see core inflation coming back down to target until at least after 2025.”
GDP growth forecast
“The US economy has proven remarkably resilient to rate hikes, and the third quarter is on track to post strong growth.”
“With the policy rate set to stay elevated and inflation having decelerated, real rates will become increasingly restrictive.”
“Lags from monetary policy tightening could be long-lasting, and we now see the economy decelerate in Q4 and tip into a shallow contraction in 2024, delayed from Q3.”
“We still expect credit tightening to slow cyclical spending, and we see diminishing tailwinds and up-coming headwinds to consumers and firms’ finances.”
“We are therefore raising our 2023 real GDP growth forecast to 2.1% YoY from 1.6% and expect growth to average 0.4% in 2024.”
Moody’s Analytics – VIX and APAC region update
VIX hits its lowest value
“Corporate credit spreads exhibited significant volatility throughout August, but by the end of the month they returned close to the levels at the start of the month and slightly below their 12-month lows.”
“Tight credit spreads show market participants remain confident in the creditworthiness of borrowers and see the overall economy as favorable.”
“As a result, despite monetary policy tightening worldwide, market participants see a high likelihood for a “soft landing.”
VIX reflects optimism for investors
“The VIX index also reflects investors’ optimism: the index dropped below 14 points Wednesday, its lowest value this month.”
“In the past, there has been a significant correlation between credit spreads and equity market volatility, as measured by the VIX.”
“This relationship was disrupted in recent years, but the recent decline in the VIX has brought it back in line with high-yield spreads.”
Financial conditions momentum
Financial conditions, meanwhile, will remain tight. The 10- year Treasury yield rose from 3.85% to 4% from July through early August, averaging 3.6% in the second quarter.”
“We anticipate that the yield will average 4% in the third quarter, and then decline slightly until 2025, averaging between 3.8% and 3.9%.”
“However, despite rising interest rates and mixed earnings reports for the second quarter, stock prices gained more ground in July, thanks to easing inflation data.”
East asia continue to expand. but the expansion is slowing
“One of the key factors allowing the APAC economy to expand is the reduction in inflation, ongoing since late last year.”
“Lower energy and food prices have brought the inflation rate close to the targets of a number of central banks in the region.”
“Lower fuel and commodity prices have been the primary reasons for the improvement in inflation.”
“One factor that would support the APAC region would be a more rapid return of high-spending tourists from China. So far, the return has been incomplete.”