Do these tensions constitute an opportunity to invest in the perspective of a year 2023 which should be that of disinflation?
We must remain cautious, but the English bond crisis could have entered its resolution phase with the resignation of the Chancellor of the Exchequer and the prospect of a less expansionary British budget. This would allow monetary policy to be a little less restrictive, which relieves tensions on the bond markets for the time being (Chart 1). However, it remains to be seen whether the liquidity problems of pension funds will not recur, while the Bank of England is supposed to no longer act as a buyer of last resort from 17 October. A stabilization of UK bond yields from that date would clearly be good news for the financial markets.
Whatever happens, the British crisis will have further accentuated the debates on the appropriate policy mix for a Europe plagued by the risk of stagflation. The current consensus seems to be moving in favor of a fiscal policy that is certainly expansionary but “not too much” in order to fight against the energy crisis without causing the fiscal deficits to explode. As for monetary policy, it organizes a rapid readjustment of monetary rates, while keeping them well below the level of inflation. But this consensus is an average that hides deep disagreements, for example inside the ECB, between those who believe that rates should rise much more, and those who plead for restraint in the face of the high risks of recession. The only virtual certainty: ECB rates should be around 2% at the turn of the year. The rest of the operations will largely depend on the level of resilience of the European economy in the face of General Winter. Despite these uncertainties, however, it still seems difficult to position oneself in favor of European bonds at yield levels that offer almost no risk premium against a sharper-than-expected rise in money market rates in 2023 (Chart 2).
In the United States the situation is different. For the next few months, the probability of a recession still seems low, and inflation remains the only concrete problem. Again up sharply in September (+0.6% excluding food and energy, and +6.6% year-on-year, at their highest in 40 years), consumer prices do not yet reflect the drop in inflationary pressures apparent in a number of indicators. This is particularly the case for rents, the rise in which has started to decelerate for new rentals, which will only very gradually affect the stock of all rented accommodation. A recent study suggests that rent inflation in the consumer price index will peak at the start of 2023 before declining, especially in the second half of next year (graph 3).
In this context, unless the US economy soon suffers a sharp slowdown, the US Federal Reserve will maintain its money market rate target of at least 4.5% in the spring of 2023 (from 3.125% today). This policy is however already in market prices, which anticipate Fed rates at 4.88% in March 2023. In addition, long-term US bond yields now benefit from significantly positive real rates (+1.6% on 10-year Treasuries indexed to inflation). The return/risk profile of the US bond market therefore seems to us to be better than that of the euro zone.
It is therefore not impossible that long-term US rates will end up stabilizing at levels close to 4%. If so, equity markets could also stabilize, as the correlation between the two markets has been strong in recent years (especially since 2018). In the absence of a substantial economic slowdown in the United States, our level of conviction on this scenario remains insufficient, however, at this stage, to significantly raise our risk exposure rates. Our preference therefore still goes to the money market. Of course, we remain ready to adjust our positions at any time in the face of these markets, which are certainly very difficult, but where there will be no shortage of opportunities in the coming weeks.
Source: Fibee
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