Q1 2023 Outlook
Macro backdrop for Q1, as I see it.
Rough and Ready Summary of Macro Backdrop
Rate hikes are an ongoing risk as growth and inflation fall
Market expecting 25bps at the February and March meetings but 2-yr yield is off it’s highs possibly signalling that there might be only one hike left
QT is ongoing and debt ceiling issues are starting to loom. Treasury General Account has room to continue drawing down but at the current rate only has about 3 months of run-rate left
CPI came in lower but still very elevated. Down sharply for goods but services & housing still not showing weakness. Employee wage inflation rate increase rate has slowed but unemployment still falling.
PMIs in contraction territory globally
Consumer sentiment is awful everywhere
DXY well off its highs and on the brink of a trend change
Given the above I am generally still bearish despite the recent rally in risk assets. Higher lows and a divergent indicators are promising but essentially we are getting to the make-or-break point in many assets.
DXY, SPX, EEM, HYG, USDEUR, WTI, HG1 & US10Y are all at or near important levels and whilst there are reasons to be optimistic such as China reopening and deploying some liquidity support and European PMIs turning up (although still in contraction territory), with all the risks over the next couple of months I still don’t see enough reasons to swing back to bullish.
What Will Change My Mind?
DXY breaks below 101 & survives a back test
Copper ($HG1) breaks above $4.5
HYG above 80
MOVE index breaks down
WTI 0.00%↑ breaks up from the current $70-$84 range & starts putting in higher lows
XLK outperforms
Korea and Japan show accelerating exports and manufacturing PMIs go back above 50.