Markets are looking to the release of US core inflation, the Federal Reserve’s preferred measure, for signs of whether it is done raising interest rates. Meanwhile, headline inflation rose to 3.7% in August, although core inflation (which excludes unprocessed food and energy) fell to 4.3%. In addition, the survey of the University of Michigan recently showed a decrease in one-year inflation expectations, to 3.1%, the lowest since March 2021. But consumption remains stable and inflation no food, energy and housing resistance. Indeed, the oil market remains stressed by production cuts, including reduced exports to Russia, with prices close to our target of $95 per barrel for Brent by the end of the year.
In addition, it is almost time for an agreement on the Federal funding budget to avoid the shutdown of the US government on October 1.
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In this state of affairs, the Federal Reserve left its interest rate unchanged, but surprised the markets with the option to raise it again this year, expecting it to reach 5.13% by the end of 2024. So the yield to maturity Ten-year US debt reached 4.5%, the highest since 2007. At the same time, the Federal Reserve revised its growth projections for 2023 to 2.1 %, showing greater confidence that the US economy can withstand “higher interest rates” and achieve a “soft landing.” For our part, we have raised the real GDP growth forecast for the US this year to 2.1%, although we estimate that it may suffer a slight contraction in 2024.
Meanwhile, the European Commission and the ECB lowered their GDP growth forecast for the eurozone this year to 0.8%, although the maturity yield on ten-year German bonds exceeded 2.7%, a ten-year high. . Our forecast for real GDP growth this year in the eurozone is 0.5%.
For its part, the Bank of England, facing concerns about long-term negative effects, left its interest rate unchanged at 5.25%, but indicated that monetary policy should be “strict enough time” and makes it easier to adjust. The Swiss National Bank also kept rates on hold, pointing out that monetary tightening in recent quarters has curbed inflation. Even the Bank of Japan left its interest rates unchanged, but we must pay attention to the hints of its governor Kazuo Ueda on the possible end of the period of negative interest rates and it is possible that we will witness the withdrawal of control of reach. Japan’s debt maturity curve. In any case, Japan’s economic performance has been remarkable, with governance reforms and an accommodative central bank. Our forecast for Japan’s GDP growth this year is 1.3%.
However, Brazil’s central bank lowered its interest rate by 0.5% for the second time. It should be taken into account that Latin American countries have led the cycle of interest rate hikes and now, in the face of concerns about a slowdown, they are leading in flexibility. For their part, Asian central banks have been shy about cutting rates. In general, yields to maturity on emerging market debt in the local currency are expected to decline.
As for China, prices have become less inflationary. Your economy will be subject to accelerating retail sales and credit growth. Momentum may recover moderately by the end of the year through monetary and fiscal policy stimulus and our GDP growth forecast for 2023 is 5.2%.
September has historically been a difficult month for equities
September has historically been a difficult month for equities, often with increased volatility. Indeed, the Russell 2000 index of small-cap stocks reflected concerns about the US economy as energy prices rose and the potential for earnings disappointment this third quarter. In fact, we undervalue small-cap stocks, as they have a higher proportion of variable interest rate debt. The bottom line is that cyclical stocks stopped outperforming defensive stocks because markets were worried about the impact of longer-term high interest rates. We are underweight US equities due to valuations, but neutral on European and Japanese equities. We prefer European banks over US banks based on valuation. We are also neutral on Asian stocks, although we expect economic and real estate difficulties to stabilize in China.
In fixed income, US Treasury bonds are overweight, although there is caution about sensitivity to changes in interest rates. Inflation-linked US Treasuries with two-year maturities are attractive, providing protection. In terms of corporate debt, the profitability of short-term investment grade credit is attractive, but the profitability differentials of higher risk corporate debt are worrying. Today, we are overweight emerging market local currency government bonds.
