More “Stagflation-Lite”, Moderately Positive On Equities Ex Europe, Still Negative On Global Bonds

Global economic recovery slightly below consensus, with inflation above consensus, but skirting global recession

Our mid-March meeting’s “unenthusiastic” stance on global equities and negative stance on global bonds was a respectable decision, as was the overall macro theme “Stagflation Lite with GDP somewhat worse than consensus, but skirting recession.” Globally, GDP consensus for CY22 is now, with the exception of the Eurozone (dubiously so, in our view), moderately below what it was in March. However, partly due to US inflation being even higher than our consensus-exceeding forecast, our bond yield forecasts, especially for US Treasuries, were far too low, and thus the USD appreciated much more than we expected. Our forecast that G-3 central banks would be more hawkish than consensus was accurate, but they, except the BOJ so far, have been even more so than we expected. Since our meeting’s call for moderately higher commodity prices, grains are up slightly, but industrial metals are well below. Brent is below what we expected, noting that March’s meeting coincided with Brent’s near-peak levels on a rolling front-month basis, while the current front month, August, equals that on our meeting’s base date. Our very cautious stance on geopolitics not getting better globally, and that multiple market-impacting events would occur, was quite predictive, but we did not forecast lockdowns in China and their associated stagflationary global supply chain woes.

Looking forward in obviously murky conditions, on 23 June, out of the six macro-economic scenarios presented, our committee was fairly split between the continuation of this scenario and a more positive scenario of inflation falling steadily along consensus lines, but the plurality decided to proceed with the former. Thus, there is more upside risk for markets and economies than downside, in our view. Given the continuation of this scenario, we expect corporate guidance in the upcoming earnings season to be even more cautious, with global demand decelerating while margins are being squeezed by higher labour and other input costs. Supply chain disruptions should continue to burden profitability too. We have said for years that no one should doubt the ability of US corporations, in particular, to boost profits, but the quarters ahead should be especially challenging. Investor sentiment, meanwhile, will likely remain cautious, especially as we expect the Ukraine conflict to cause major economic dislocations, especially for Europe, but based on this backdrop, our fixed income and equity teams delivered targets that imply improved performance for global equities in aggregate for the next three to six months (although quite negative for Europe), with moderate weakness for global bonds. We expect commodity prices to rise mildly further, as the world-ex Europe avoids the high chance of recession currently priced into markets, even as we forecast that central banks will be slightly more hawkish than consensus.

Our new scenario predicts that globally, GDP will mildly underperform consensus, with the US up 2.1% on a Half on Half Seasonally Adjusted Annualised Rate (HoH SAAR, as used in all references below) in the 2H22 and 1.3% in the 1H23 (vs consensus of 2.3% and 1.4%, respectively). Personal consumption should grow only moderately, with increased production of autos fulfilling pent-up demand as one of the few major areas of growth, while private capex and government spending will likely be subdued. Meanwhile, net foreign trade will likely continue to subtract from GDP growth, as will housing construction.