Stocks appear to be ending the week in full swing after a recent batch of stronger-than-expected economic data led to more hawkish comments from .
This is not a great scenario for “pessimistic bulls,” as Gavekal Research Chairman and Chief Economist Anatole Kaletsky calls those investors who consider themselves “cautiously pessimistic because they expect an early recession in the US.”
He adds that they are actually “very optimistic” because they hope that any economic downturn will help bring down inflation quickly and allow the Federal Reserve to start cutting by the summer. This, in turn, will cause both bonds and stocks to rebound to the scale they enjoyed before Russia invaded Ukraine.
Unfortunately for this tribe, the American recession in the next few months will not happen, as Kaletsky believes, and if anything, the speed and growth of the economy is likely to increase later in 2023, which casts a shadow not only on stocks and bonds, but also On the dollar too.
Here are 10 reasons why Kaletsky thinks a recession is a fantasy this year.
- In the post-war era, the US recession never really started as real interest rates were very negative across the yield curve. If we focus on the level of interest rates rather than the rate of change, this monetary tightening is still the lightest of any cycle since the 1950s.
- Long real interest rates will remain negative even after the federal funds rate reaches 5%. The US yield curve is so deeply inverted that real long rates will remain negative even if inflation falls below 5% unless the curve rapidly shifts. Neither of these events is likely to occur in the coming months.
- An inversion of the yield curve is not a useful indicator of a recession. Inversions have preceded all US recessions since 1970, but there have been many wrong or premature predictions (in 1966, 1978, 2006, and 2019).
- The US job market is too strong for a recession.
- Gross real income is growing while average real wages have fallen. That is because “the rapid growth in employment has more than offset the decline in real wages.”
- Real wage growth will soon become positive. With the labor market still tight, wage gains should continue above 5% for the next few months while price inflation should fall below 5%, barring another oil shock.
- The stock of personal savings remains well above normal, thanks to government Covid grants and cuts to consumption during lockdown. It is generally agreed that the size is between $1-2 trillion, which is equivalent to between 5% and 12% of household consumption in the United States.
- Housing is now settling down. Today’s 30-year mortgage rate is lower than at any time in US history prior to the housing bubble of 2004.
- The activity shifts from goods to services. Large losses in manufacturing are offset by smaller gains in the much larger service sectors. The net result is that the economy continues to grow.
- The American recession in 2023 will not happen. And if a mild US recession occurs this year, as most investors now expect, we will all have to reconsider what we thought we knew about fiscal prudence, sound monetary management and tough political trade-offs.
So, in short: Recession will not happen, Kaletsky believes.
“This means that the real question about monetary policy in the US this year is not when the Fed will start easing. It is whether in the summer the Fed decides to tighten significantly more, or accept permanently higher inflation – either way it will This leads to a second decline in bond and stock prices,” says Kaletsky.
Gold and recession
It could rise to $4,000 an ounce in 2023, as high interest rates and recession fears keep markets volatile, said Jörg Kenner, managing director and chief investment officer at Swiss Asia Capital. He expected the price of the precious metal to reach between $2,500 and $4,000 sometime this year.
He added that there is a good chance that the gold market will witness a big move, adding, “It will not be 10 percent or 20 percent only,” but it is a movement that “will really reach new heights.” Keener explained that many economies may experience a “bit of a recession” in the first quarter, which could lead to many central banks slowing down the pace of interest rate hikes and making gold immediately more attractive, and said that gold is the only asset that every central bank owns.
According to the World Gold Council, he said investors will be looking to gold as inflation remains high in many parts of the world. “Gold is a good hedge against inflation and is a great catch during stagflation and a great addition to a portfolio,” he continued.
However, Kenny Polkari, chief market strategist at Slatestone Wealth, disagreed that prices could double next year, saying, “I don’t have a price target of $4,000 although I would like to see the yellow metal go there.”
Polkari argued that gold prices will see some decline and resistance at $1900 an ounce, and said that prices will be determined by how inflation responds to higher interest rates globally. He added, “I have always loved gold, and believe that it should be part of every investor’s portfolio. I think it will perform better, but I do not have a price target of $4,000.”
dollar and recession
PIMCO Investment Management Company indicated that the dollar will lose its attractiveness in light of the receding fears of recession and high inflation.
PIMCO analysts indicated that the Fed may raise interest rates again, before stopping the tightening policy, which will negatively affect the dollar against a basket of other currencies.
While experts at Westpac Bank believe that the dollar is expected to gain more downward momentum in the middle of this year, and the weakness will continue until the end of next year, especially with expectations of calming inflation risks in the middle of this year.
Experts at the bank indicated that the dollar index is still expected to move below its current level, although it is likely that this move will not be down to this level during the months, and the reason for this is that inflation risks still exist in the United States and other developed markets. .
The bank’s economists explained that the United States is still the most flexible and moving country with regard to monetary policy, especially in light of the strength of labor market conditions, and the US Federal Reserve’s willingness to take the necessary measures to control high inflation, and this in turn supports the dollar, but with the advent of mid-2023, it will not Inflationary pressures will persist, job creation will decline again while wage growth will continue to slow, and Canada will outperform the US and UK and this will have a negative impact on the dollar’s movements.
Economists at Commerzbank believe that the US dollar will continue to gain strength at the present time, due to the positive US economic data, which was a key factor in supporting the strength of the US dollar.
Also, analysts at Commerzbank pointed out that the statements of some hawkish members of the US Federal Reserve have strengthened the dollar at the present time.
In this context, Loretta Mester, a member of the US Federal Reserve, said that there is a convincing case for raising the interest rate by 50 basis points at the meeting next March, and this would support the levels of the US dollar.
Likewise, James Bullard, monetary policy maker at the US Federal Reserve, stressed that the additional interest rate increases will continue, in light of the beginning of the decline in inflation rates, indicating that the country’s economy is growing faster than it was in the second half of 2022, thus enhancing the strength of the US dollar.
