Now that November has drawn to a close, we wanted to publish a market update exploring how the global economy is expected to slow further due to inflationary pressures from Russia’s invasion of Ukraine and how corporate earnings will likely come under pressure in 2023.
The Flash Purchasing Managers’ Index
Firstly, S&P Global publishes Flash Purchasing Managers’ Index (PMI), an early indication for this leading indicator. The early Global PMI results for November have indicated a broad-based output decline across the G4 (the four main developed economies, i.e. US, UK, Eurozone, and Japan). Furthermore, the OECD has recently stated that the global economy is expected to slow further, given the current headwinds, including inflationary pressures caused by Russia’s invasion of Ukraine. The surging costs to households and businesses due to higher inflation and interest rates affect confidence and increase global economic risks.
Update on US inflation
Elsewhere, the US sees encouraging signs that inflation is trending downwards. The Bureau of Labor Statistics released US Consumer Price Index data for October, showing an increase of 7.7% from the previous year. This follows inflation readings of 8.2% for September. Core inflation (excluding food & energy) was 6.3% in October, down from 6.6% in October. Meanwhile, Western Europe’s inflationary pressures are going in the other direction. The annual inflation rate in the UK was above the consensus forecast at 11.1% in October, a 41-year high, from 10.1% in September. The Euro area inflation reached 10.6% in October, up from 9.9% in September.
The Federal Reserve is expected to continue raising rates at a slower pace heading into their next few meetings. The investor consensus is that US Fed Funds rates are expected to rise by 100 basis points at the next few meetings and peak near 5% by the end of the first quarter of 2023. We can expect that the European Central Bank & Bank of England will also continue to raise rates to bring inflation in line with medium-term targets promptly.
What do we expect 2023 to bring?
As we look towards 2023, corporate earnings will likely come under pressure, given the sharpest rise in borrowing costs in four decades. This could trigger some equity weakness in the short term. Bonds are likely to fare better during the early part of the year, as inflation comes off multi-decade highs, given that the asset class is an increasingly attractive source of yield and diversification within balanced portfolios. Subsequently, equities will likely recover during the latter half as the Federal Reserve pivots its tight monetary policy.
Some final words
When there are any concerning changes in global market data, it’s important to remember that investors generally cannot time markets successfully. The best strategy is not to make rash decisions and consider the long-term outlook instead.
Please contact us if you have any questions about this market update or want to learn more about Brite and how we can maximise your pension and investment assets.