Nothing lasts forever
Three things to watch in 2023.
Published December 13 2022
Dollar fade Peak inflation, a less hawkish Fed, rising recession risk and a reopening China are likely to keep the dollar from surprising again. This year’s unexpected surge was driven by a record 325 basis-point jump in the 5-year Treasury yield, a move that’s topping out. The U.S. Dollar Index already is down 8% from its mid-October peak. A weaker dollar would be good for oil, copper and other commodities, emerging markets, cyclical sectors of the U.S. economy and earnings. Fundstrat estimates the strong dollar subtracted 8% from EPS this year and, if it softens next year, could add 5% to 2023 EPS.
Disinflation Market rents, which eventually feed into shelter prices that account for 40% of core CPI, are plunging. Goods and energy prices, too, with oil and natural gas down roughly 40% from Russian-invasion highs. Widespread inflation could give way to disinflation if the economy keeps slowing and/or enters recession. Wage increases are still elevated but should moderate as job growth slows while, overseas, supply-chain disruptions are easing, shipping costs are normalizing, and both the Korean won and Japanese yen are at multidecade lows. A wave of cheap imports could be next.
Peak China China’s double-digit growth helped lift the world’s economy out of the global financial crisis. Don’t expect an encore. An aging population, shrinking labor force, sick property market and heavy-handed consolidation of central authority are anchors. And with wages that are more equalized with the developed world, China’s no longer the global source for incremental cost savings. Covid protests, factory uprisings and its Russian alliance have dropped business confidence in the country to a 23-year low, according to an American Chamber of Commerce survey. If Apple, which is looking to ship iPhone production out of the country, can’t make China work, who can? Still, low valuations and high household savings could bolster battered Chinese stocks. The Hang Seng already has rallied 31% off this year’s 13-year low, though it still trails February 2021’s pandemic-cycle high by 26% and 2018’s record high by 40%. A lot depends on how fast China can reopen. Numerous Wall Street sources doubt earlier-than-expected Covid-policy easing will accelerate the recovery.