2023 Global Outlook | TD Securities
By: Richard Kelly, James Rossiter, Priya Misra, Cristian Maggio, Mark McCormick, Mitul Kotecha, Bart Melek
November 17, 2022 - 6 minutesGlobal Macro Outlook: A Not-So Fine Balance
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
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
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
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
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
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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Head of Global Strategy, TD Securities
Head of Global Strategy, TD Securities
Head of Global Strategy, TD Securities
Head of Global Macro Strategy, TD Securities
Head of Global Macro Strategy, TD Securities
Head of Global Macro Strategy, TD Securities
Head of Global Rates Strategy, TD Securities
Head of Global Rates Strategy, TD Securities
Head of Global Rates Strategy, TD Securities
Head of Portfolio Strategy, TD Securities
Head of Portfolio Strategy, TD Securities
Head of Portfolio Strategy, TD Securities
Head of FX Strategy, TD Securities
Head of FX Strategy, TD Securities
Head of FX Strategy, TD Securities
Head of Emerging Markets Strategy, TD Securities
Head of Emerging Markets Strategy, TD Securities
Head of Emerging Markets Strategy, TD Securities
Head of Commodity Strategy, TD Securities
Head of Commodity Strategy, TD Securities
Head of Commodity Strategy, TD Securities