After a turbulent 2022, there will be a lot of factors affecting the investment market in 2023. I have picked three most important ones to talk about.
• When will Fed stop hiking rate?
• Will there be a global recession?
• How could China’s reopening impact the market?
When will Fed stop hiking rate?
I respect Fed’s pivot table showing Fed Fund Rate will go up to 5.1%, but I don’t think it will go any higher, nor will it go below that level by the end of 2023. The pattern of interest rate hike could be (1) three 25 bp hikes or (2) one 50 bp followed by one 25bp. The market will cheer if the next hike in Feb is 25 bp since it opens the door for the terminal rate below 5%, but my assumption is on two hikes of 50 and 25 bp each that will end the hiking cycle by Q1.
Obviously, inflation peaked in US. Gas price had normalized and the drop in house price will eventually press the rent. The cash consumer accumulated during pandemic is exhausting and the layoff will make consumption more cautious. High base will also have a negative effect on annual inflation change. We will see inflation in a down trend in 2023, but we might not see the annual inflation rate drop to 2% target by end of the year. However, a “positive” real interest rate will allow the FED to stop hiking rate, especially the threat of recession is coming closer.
The Fed funds futures are currently reflecting differently and presenting a good opportunity to trade if 5% is the terminal rate by Q1. Short the April contract now helps express your market view in this scenario.
Will there be a recession?
YES, we will have a recession. The aggressive rate hikes by global central banks put a strong brake on economy growth. High interest rates stifled many lending activities, especially on high price tag items such as mortgage and car loan. Recession is also a self-fulfilling prophecy. When everyone is talking about recession, and your banker is telling you there will be recession, the preventative measure you taken will contribute to recession. Corporate will reduce capital expenses/investment and layoff people to reserve capital, and consumer will restrict spending to reserve cash flow. Not to mention the way the company handle the supply chain issue during pandemic is also back firing. Some companies expanded the capacity because there was a shortage, but this becomes excessive when activities return to normal. Semiconductor is a good example, and you can now easily get a PS5 without crazy markup.
The financial markets haven’t factored in the risk of recession, except the yield curve inversion. Stock market is still focusing on Fed policy and lacks enough attention on recession. We might have more recession discussion in Q1, which might offset some of the positive effect if Fed accomplished their mission. A recession might officially realize in the 2H 2023, which will have a material impact on company’s revenue and earnings. I don’t foresee a deep and prolonged recession, as the Fed has plenty of room to avoid it. Since stock market is forward-looking, we might see the lows of stock market in 1H, and some recovery in the 2H, but I don’t think we will revisit the new highs. After a significant underperformance in 2022, growth stock might perform better when the Fed stop hiking rate.
How could China’s reopening impact the market?
I am pessimistic on China’s economy. Reopening can end the pain but doesn’t mean the economy will see an immediate boost. The three-year covid zero restriction had already hurt the root of the economy and depleted most of the confidence and purchasing power of consumers, corporate and government. I don’t foresee same material “revenge consumption” happened in the west when the economy is reopened, since Chinese consumers didn’t receive cash from the government, nor any wealth effect from stock and property market. Chinese government is good at stimulating the economy by infrastructure investment, but not much on consumer demand. Even the government wants to do something, they will first need to find enough cash. Companies diversified their production line will not come back just because of the reopening since they already learned in the pandemic it is harmful to put all the eggs in one basket. Not to mention the fact that the political tension with US will make thing worse.
Comparatively, open-up is still better than lockdown, but the positive impact might be less than many expected. We might see some commodity prices such as crude oil and copper goes up because of the reopening, but the threat of global recession might offset some of the positive effect. Since China is now experiencing the peak of pandemic, we might have a clearer picture after Chinese New Year. We can use commodity price as leading indicators to access how strong the positive impact is.
Happy trading and wish you have a fruitful year of 2023.
Disclaimers
Above information are for illustration only and there is no guarantee on the accuracy of the information. They should not be treated as investment recommendations or advices.
• When will Fed stop hiking rate?
• Will there be a global recession?
• How could China’s reopening impact the market?
When will Fed stop hiking rate?
I respect Fed’s pivot table showing Fed Fund Rate will go up to 5.1%, but I don’t think it will go any higher, nor will it go below that level by the end of 2023. The pattern of interest rate hike could be (1) three 25 bp hikes or (2) one 50 bp followed by one 25bp. The market will cheer if the next hike in Feb is 25 bp since it opens the door for the terminal rate below 5%, but my assumption is on two hikes of 50 and 25 bp each that will end the hiking cycle by Q1.
Obviously, inflation peaked in US. Gas price had normalized and the drop in house price will eventually press the rent. The cash consumer accumulated during pandemic is exhausting and the layoff will make consumption more cautious. High base will also have a negative effect on annual inflation change. We will see inflation in a down trend in 2023, but we might not see the annual inflation rate drop to 2% target by end of the year. However, a “positive” real interest rate will allow the FED to stop hiking rate, especially the threat of recession is coming closer.
The Fed funds futures are currently reflecting differently and presenting a good opportunity to trade if 5% is the terminal rate by Q1. Short the April contract now helps express your market view in this scenario.
Will there be a recession?
YES, we will have a recession. The aggressive rate hikes by global central banks put a strong brake on economy growth. High interest rates stifled many lending activities, especially on high price tag items such as mortgage and car loan. Recession is also a self-fulfilling prophecy. When everyone is talking about recession, and your banker is telling you there will be recession, the preventative measure you taken will contribute to recession. Corporate will reduce capital expenses/investment and layoff people to reserve capital, and consumer will restrict spending to reserve cash flow. Not to mention the way the company handle the supply chain issue during pandemic is also back firing. Some companies expanded the capacity because there was a shortage, but this becomes excessive when activities return to normal. Semiconductor is a good example, and you can now easily get a PS5 without crazy markup.
The financial markets haven’t factored in the risk of recession, except the yield curve inversion. Stock market is still focusing on Fed policy and lacks enough attention on recession. We might have more recession discussion in Q1, which might offset some of the positive effect if Fed accomplished their mission. A recession might officially realize in the 2H 2023, which will have a material impact on company’s revenue and earnings. I don’t foresee a deep and prolonged recession, as the Fed has plenty of room to avoid it. Since stock market is forward-looking, we might see the lows of stock market in 1H, and some recovery in the 2H, but I don’t think we will revisit the new highs. After a significant underperformance in 2022, growth stock might perform better when the Fed stop hiking rate.
How could China’s reopening impact the market?
I am pessimistic on China’s economy. Reopening can end the pain but doesn’t mean the economy will see an immediate boost. The three-year covid zero restriction had already hurt the root of the economy and depleted most of the confidence and purchasing power of consumers, corporate and government. I don’t foresee same material “revenge consumption” happened in the west when the economy is reopened, since Chinese consumers didn’t receive cash from the government, nor any wealth effect from stock and property market. Chinese government is good at stimulating the economy by infrastructure investment, but not much on consumer demand. Even the government wants to do something, they will first need to find enough cash. Companies diversified their production line will not come back just because of the reopening since they already learned in the pandemic it is harmful to put all the eggs in one basket. Not to mention the fact that the political tension with US will make thing worse.
Comparatively, open-up is still better than lockdown, but the positive impact might be less than many expected. We might see some commodity prices such as crude oil and copper goes up because of the reopening, but the threat of global recession might offset some of the positive effect. Since China is now experiencing the peak of pandemic, we might have a clearer picture after Chinese New Year. We can use commodity price as leading indicators to access how strong the positive impact is.
Happy trading and wish you have a fruitful year of 2023.
Disclaimers
Above information are for illustration only and there is no guarantee on the accuracy of the information. They should not be treated as investment recommendations or advices.