The bear market rally materialised, but strong US November job market data cooled the markets’ dovish narrative, creating a mixed picture for US inflation, given that the service components remain sticky. The Fed, for its part, slowed the pace of rate hikes, but reiterated that its job is far from over. We believe central banks, including the ECB, will be walking a policy tightrope, as risks of mistakes are high.
On the other hand, we see increasing geopolitical risks in Europe and the US. In EM, the acceleration of reopening in China should result in a rebound sooner than expected, at a time when Europe will still be in recession and the US in a marked slowdown. This highlights a key feature of the 2023 outlook: the strong regional asynchrony in the economic cycles which could result in opportunities for investors.
For markets, this economic backdrop calls for a confirmation of a correction regime at the end of 2022 and in H1 2023, with inflation slowing, but still above normal levels. The correction phase will be driven by the profit recession, which will materialise in particular in H1. Investors should not add risk, but after the recent upside, return to a more cautious stance in equities and be prudent overall.