2023 Global Outlook | TD Securities

November 17, 2022 - 6 minutes
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Global Macro Outlook: A Not-So Fine Balance

High inflation and labour market tightness increasingly suggest that a significant downward structural shift in global capacity has occurred. We expect inflation across most of G10 to hold above target all through 2023. Central banks have been caught on the back foot, and are now forced to fight too-high inflation by raising their policy rates above neutral, at the cost of growth and higher unemployment. The battle against inflation is far from done, and could turn ugly very quickly, and we look for a worse outcome in the US than the current soft-landing consensus.

We look for G10 central banks to drive real rates into positive territory in 2023, via both hikes in the nominal rate and seeing inflation ease back from peak levels, holding policy rates at their terminal values through a global recession. Only in 2024 do policy rates start to return toward neutral.

Global Rates Outlook: Holding My Breath

The overarching theme in 2023 will be one of central banks being torn between their competing and conflicting growth and inflation goals. The broad-based nature of inflation suggests that even though it should decline, it could be sticky at high levels. Meanwhile, the tightening in monetary policy thus far should start to weigh on growth. We expect the Fed to be the first G10 central bank to ease policy in Q4 2023, followed by others in 2024. We like owning US against global rates and expect global flatteners with the CA curve outperforming.

A central bank community reluctant to ease rates, low FX reserve accumulation, and mutual fund and bank deposit outflows should keep term premium elevated through much of 2023. However, signs of weakening growth should bring in some buyers of duration. Any change in BoJ YCC could have significant spillovers into global rates. We expect the BoJ to shift YCC in Q2 2023 by moving the band wider by 10bp.

The repricing in asset classes during the current cycle has been unprecedented in magnitude and speed. Despite regulations and stress tests, the rapid adjustment challenges markets and institutions. Lower liquidity amplifies the reaction. The UK LDI debacle was an example of failure in risk management, and we remain concerned about other potential market vulnerabilities.

Portfolio Strategy: A Credit Compass to Navigate the Complexities of 2023

In our base case scenario of a recession, equity valuations and corporate earnings should adjust downward in 2023. We disagree with the forward-earnings consensus that implicitly prices a soft-landing. Therefore, we expect equity markets to be under pressure and IG spreads to widen by 50-75bps to the 200-225bps range in 2023.

This scenario calls for defensive positioning in credit excess-return portfolios. The strategy is less clear for total-return investors. They will likely face two opposite forces, as the rates outlook calls for adding duration exposure. The positive news is that these dynamics point to a reversal of negative correlations between credit and long-end rate returns in 2023. Hence, we expect a relatively better year for total return investors.

G10 FX Outlook: Fast Times At DollarMont High

The USD outlook hinges on three themes that have dominated the 2022 narrative and provide the handoff for 2023: global growth, terminal rate pricing, and the terms of trade shock. While the unrelenting phase of the USD rally is behind us, 2023 will feature a resilient USD to start the year. In turn, we look for one more push higher, followed by consolidation, and then the reversal.

Early 2023 will feature a handoff of the key drivers of 2022. Global growth bottomed out in Q2, reflecting a tricky winter for Europe and the scope that China disappoints hopes for a rapid reopening. Meanwhile, the Fed will likely diverge on major central bank terminal rate pricing en route to 5.5%, underscoring the vulnerabilities to housing and domestic growth across most of the G10.

This backdrop should give way to a slowing US economy, a peak in commodities, and the resulting terms of trade shock, sparking a growth recovery in Europe in late H1. An acceleration in China through H2 should boost the global growth outlook, easing stagflation concerns and associated hedges. A focus remains on the macro-dynamics, but the USD's extreme valuation starts to bite.

Emerging Markets Outlook: Opportunities in the Malaise

We expect weaker growth trajectories for most EM economies in 2023. The decline in inflation rates across EM is likely to be slower than in DM. Many central banks in EM will remain behind the curve. We forecast the Latam hiking cycle to end earlier than in other EM regions. Policy rates will remain elevated in EMEA, but there's scope to ease by end of 2023. Asian central banks (except China) will continue to hike.

Near-term pressures on EM FX to persist, but we see some, albeit limited scope for recovery. We are wary of bouts of USD strength. Some worsening in external metrics (e.g. in EMEA) will increase FX vulnerability. Valuations and positioning suggest many EM local currency bonds and FX have cheapened significantly, offering better value to EM investors even in the face of weaker growth / higher rates.

Commodities Outlook: Not as Bad as Advertised

Investors have abandoned the commodity sector since the Federal Reserve started to aggressively tighten monetary policy, which stoked recession fears, and when it became apparent that China has entered a period of unusually weak economic growth. We predict that capital flows into the sector and prices will be subdued into 2023, as demand growth for crude oil and industrial metals remains relatively weak amid increasingly restrictive monetary policy and economic weakness throughout much of the world.

Despite the powerful macro and monetary policy headwinds blowing against energy and base metals, any negative price impact is likely to be modest by historic standards due to negative supply shocks. Crude oil prices are projected to move higher into 2023, with base metal prices expected to post only modest declines in the early part of the year, followed by a relatively robust recovery.

Sharply higher real interest rates along the Treasury curve, driven by the Fed's aggressive tilt to a restrictive monetary policy stance and falling inflation expectations drove gold down from $2,050/oz in March to as low as $1,617/oz in early-November. A continued sharp increase in US real and nominal rates along the short end of the curve may drive gold toward $1,575/oz in early 2023. The yellow metal may well start to trend up toward $1,800/oz after Q1, as it becomes clear that the Fed is approaching the end of its tightening cycle and the market starts to look toward cuts on the horizon.

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Headshot of Richard Kelly


Head of Global Strategy, TD Securities

Headshot of Richard Kelly


Head of Global Strategy, TD Securities

Headshot of Richard Kelly


Head of Global Strategy, TD Securities

Richard oversees the Global Strategy team, providing investment and strategic advice on G10 FX, rates, commodities, and emerging markets, as well as top-down global macro analysis, assessing the common trends in major economies and implications for markets. Prior to joining TD Securities in 2010, he was the Senior International Economist for TD Economics. Before that, he worked at the International Monetary Fund in Washington, D.C., and several other economic development organizations.

Headshot of James Rossiter


Head of Global Macro Strategy, TD Securities

Headshot of James Rossiter


Head of Global Macro Strategy, TD Securities

Headshot of James Rossiter


Head of Global Macro Strategy, TD Securities

James leads TD Securities' European macro coverage in London, and his research and analysis covers global and European macroeconomic trends, with a focus on core central bank views, macro data forecasting, and geopolitical risks. In his roles at the BoC and BoE, James held senior positions on the teams producing the macroeconomic forecasts and making monetary policy recommendations to policy committees.

Headshot of Priya Misra


Head of Global Rates Strategy, TD Securities

Headshot of Priya Misra


Head of Global Rates Strategy, TD Securities

Headshot of Priya Misra


Head of Global Rates Strategy, TD Securities

Priya is responsible for the macro calls on the U.S. and global interest rate markets and provides investment advice to clients. She represents TD at the Fed's Alternative Reference Rate Committee (ARRC) and is actively involved in the transition from LIBOR to SOFR. She publishes regular research on interest rates, discussing secular trends as well as trade ideas and manages a model portfolio of recommendations.

Headshot of Cristian Maggio


Head of Portfolio Strategy, TD Securities

Headshot of Cristian Maggio


Head of Portfolio Strategy, TD Securities

Headshot of Cristian Maggio


Head of Portfolio Strategy, TD Securities

Cristian provides analysis on spread products, macro credit and asset allocation, and has a focus on portfolio optimization, macro cross-asset themes and algorithmic identification of rich and cheap bonds across a vast spectrum of markets. His views are published in various TD Securities publications, including commentaries and ad hoc market musings, and regularly appears in both international broadcast and print media.

Headshot of Mark McCormick


Head of FX Strategy, TD Securities

Headshot of Mark McCormick


Head of FX Strategy, TD Securities

Headshot of Mark McCormick


Head of FX Strategy, TD Securities

Mark helps to manage the bank’s research efforts for the major foreign exchange markets, along with developing the analytical framework used for market analysis, forecasts and trade ideas across different asset classes. Before joining the bank, he worked as a Global Macro Strategist at Credit Agricole Corporate and Investment Bank in New York.

Headshot of Mitul Kotecha


Head of Emerging Markets Strategy, TD Securities

Headshot of Mitul Kotecha


Head of Emerging Markets Strategy, TD Securities

Headshot of Mitul Kotecha


Head of Emerging Markets Strategy, TD Securities

Mitul carries over 26 years of experience as a strategist and economist across offices in London, Hong Kong, and Singapore. His focus is global emerging markets and Asia macro strategy, and his product coverage includes bonds, interest rates, equities and foreign exchange. Mitul is a frequent speaker at various global economic and financial conferences, has given a TEDX talk and is regularly consulted by media for views on markets and economies.

Headshot of Bart Melek


Head of Commodity Strategy, TD Securities

Headshot of Bart Melek


Head of Commodity Strategy, TD Securities

Headshot of Bart Melek


Head of Commodity Strategy, TD Securities

Bart has over 20 years of experience analyzing global precious metals, base metals, energy, and financial markets, as well as North American and global economies. He has worked closely with commodity, equity and FX trading desks in Toronto, New York, Chicago, London and Singapore, and has several forecasting distinctions and top global rankings to his credit.