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If you had entered 2022 with a portfolio of 60% stocks and 40% fixed income, you would be down 20% so far, see chart below. With inflation still at more than 8% in the US, EU, and the UK, central banks will continue to push rates higher and stocks lower to cool down the economy and slow down earnings growth until inflation moves closer to the central banks’ 2% inflation target.
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Monetary theory points to a sharp decline in inflation over the coming months, see chart below.
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The FedEx results don’t tell us much about the broader economy because goods only make up 18% of GDP, and consumer services such as air travel, hotels, restaurants, sporting events, and concerts are not slowing down. The bottom line is that the goods sector in the economy continues to cool down, and consumer services continue to overheat, see chart below. For markets, the implication is that the Fed will continue to slow down the interest-rate sensitive goods sector, including housing and autos, while we wait for the service sector to show signs of cooling down.
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Last week, the S&P500 continued to follow the pattern seen in 2008, see chart below.
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Quantifying the Role of Interest Rates, the Dollar and Covid in Oil Prices
https://www.bis.org/publ/work1040.pdf
Labor Force Exiters around Recessions: Who Are They?
https://s3.amazonaws.com/real.stlouisfed.org/wp/2022/2022-027.pdf
Dollar Reserves and U.S. Yields: Identifying the Price Impact of Official Flows
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In March 2021, the FOMC thought the Fed funds rate would be zero at the end of 2023. Now they think the Fed funds rate at the end of next year will be 4.5%, see chart below.
Our attached Slowdown Watch PDF shows that the US economy is still overheating, with unemployment at 3.7% and inflation at 8.3%.
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The consensus is now expecting a recession in Germany in 2023, see chart below.
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Although services make up 80% of GDP, fluctuations in the goods sector are still important. Inventory levels are normalizing as a result of the supply chain improving and the goods sector of the economy slowing down, see chart below. Inventories for wholesalers are back to pre-pandemic levels, but inventories for retailers are still substantially below 2019 levels.
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Survey-based and market-based measures of inflation expectations are starting to decline, and the market believes that the Fed will get inflation down to the FOMC’s 2% target, see charts below.
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With rates rising and the dollar going up, foreign private investors are buying US Treasuries at a record pace, see chart below.
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