Winter is Coming - Saxo Bank's Forecasts for QXNUMX

I regret to disappoint younger readers of this forecast for the fourth quarter, which its title associated with Game of Thrones. It is rather a reference to a movie from the 70s. It is enough to be, in which Peter Sellers plays Chauncey Gardiner, a simple gardener who becomes a Wall Street sensation and advisor to the president. Observers misinterpret his simple gardening and seasonal tips as oracle predictions - for example:

“In the garden, growth depends on the season. First comes spring and summer, but then we have fall and winter. "

Inflation is still a problem

This year is once again coming winter for global markets. Winter has already come to cryptocurrency market last year and has been there since the Fed's return in November 2021. More broadly, the same was true for the stock market, except for a brief thaw this spring followed by a few sunny months after the meeting FOMC June 16. The interest rate hike by 0,75% at this meeting made the market hope that politics would be favorable Federal Reserve it will peak sooner rather than later due to the anticipated damage that an aggressive cycle of interest rate increases will do to the economy.

From the beginning of 2020, we argued that inflation would be deeply entrenched and persistent. We maintain this view, but are rapidly approaching the turning point for the global economy - which we will reach in the next quarter thanks to "peak aggressive monetary policy". Three factors will lead to this turning point.

• First, world central banks recognize that it is better for them to risk excessively hawkish policies than to continue to maintain the narrative that inflation is temporary and will remain within manageable limits. 
• Secondly, the US dollar is incredibly strong and reduces global liquidity by increasing the prices of imported raw materials and commodities, which reduces real growth. 
• ThirdlyThe Federal Reserve is set to finally reach the full pace of its quantitative tightening program, which will reduce its bloated balance sheet by up to $ 95 billion a month. The combination of these three factors means that in QXNUMX we should see at least an increase in volatility and potentially serious problems in the stock and bond markets.

The question investors should be asking themselves is actually the following:

If hawkish politics is reached in QXNUMX, what will happen next?

The answer is likely that the market will start pricing in anticipation of a recession, rather than simply adjusting valuation multipliers for the rise in profitability. This turning point - recession-sensitive valuations - could come in December, when energy prices peak due to the above-mentioned trio.

It is estimated that the total share of energy in the world economy increased from 6,5% to over 13%. This represents a net loss of 6,5% of GDP whether it is through price increases over lower volumes or service production, or whatever other way we want to define it. This loss has to be covered by gains in productivity or lower real rates.

And lower real rates will have to be maintained to avoid failure of our debt-saturated economies. This means that there are actually two ways to play this out: higher inflation remaining well above the reference rate or a decline in yields even faster than inflation. Which one will take effect? This is the crucial question.

Forecasts for the near future

Currently, interest rates are projected to increase in the US and internationally by another 50-70 basis points, while inflation will remain high or will decline gradually, meaning risk aversion is the most likely outcome in this period. However, beyond our projected peak aggressive scenario, the market will tend to open long positions in higher-risk assets in the event of any indication that policymakers have given up the fight against inflation as the costs of tightening become unacceptable to supporting the economy and labor markets and costs of servicing public debt. The fight continues, however, to paraphrase Chauncey Gardiner: before we have spring, fall and winter must come.

About the Author

Steen Jakobsen, Chief Economist and CIO Saxo Bank. Djoined Saxo in 2000. As a CIO, he focuses on developing asset allocation strategies and analyzing the overall macroeconomic and political situation. As head of the SaxoStrats team, Saxo Bank's internal team of experts, he is responsible for all research, including quarterly forecasts, and was the founder of Saxo Bank's outrageous forecasts. Before joining Saxo Bank he cooperated with Swiss Bank Corp, Citibank, Chase Manhattan, UBS and was the global head of trade, currency and options in Christiania (currently Nordea). Jakobsen's approach to trading and investing is thought-provoking and is not afraid to oppose consensus. This often causes debate among the global market community. Every day, Jakobsen and his team conduct research in various asset classes, covering major macroeconomic changes, market movements, political events and central bank policies. With over 30 years of experience, Jakobsen regularly appears as a guest at CNBC and Bloomberg News.