2022 was an eventful year for markets, and the early signals from 2023 suggest that the intensity is unlikely to ease anytime soon.
As we enter a new calendar year, we have already encountered a raft of signals that are both notable and worthy of debate. China has rapidly pivoted to reopening, with global implications. Developed markets continue to watch for central bank pivots and slowdown signals. Gold and the Australian dollar are benefiting from the broad US dollar retracement.
Here are five topical early reads to kickstart the year.
China's reopening after strict lockdowns has continued early this year, with mobility indicators already showing early indications of having troughed. Morgan Stanley’s team for China has further raised its 2023 GDP growth forecast to 5.7% (vs. consensus of 4.8%), as the near-term pain of a fast reopening will likely be compensated by an earlier and stronger recovery. Morgan Stanley Research believes the market is underappreciating the far-reaching ramifications of reopening and the possibility that a robust cyclical recovery can occur despite lingering structural headwinds.
After a historically sharp tightening cycle through 2022, investors remain focused on the narrative evolution from central banks. Broadly, macro data over the past month have been positive for central banks. In the US, the last few inflation prints look to have confirmed a slower pace and support a retracement from peak over the coming months, and while employment growth is slowing, so far it remains quite resilient, with unemployment still very low. In Australia, November inflation surprised to the upside, with another increase in the annual rate likely in December. From there Morgan Stanley expects inflation to follow the US path lower, but both spending and the labour market do look to be holding up a bit more strongly relative to trends in the US.
What does this mean for central banks? We think the peak in rates is likely close. A sharp decline in inflation from peak should give central banks some comfort that they are in restrictive territory. However, persistence in wages growth is likely to raise the bar for a potential pivot to rate cuts, and may keep central banks in restrictive territory for longer than markets currently expect.
The coming economic slowdown is widely expected – but the speed and severity remain heavily debated. Data over the important Christmas trading period are mixed, but mostly point to a slowing, yet still relatively resilient consumer sector.
Official retail sales data to November showed sales growth slowing sharply in the month – although sales remain well above their pre-Covid average trend. With retail prices also growing at a similar rate, this suggests minimal volume growth across the retail sector, with the entirety of nominal sales being driven by price increases.
Official data for December won't be released until the end of the month (31 January). However, it does look like consumer conditions are easing at a slower pace than the RBA would prefer – tipping the balance towards further rate hikes in the near term.
One of the more significant moves over the past few weeks has been the continued strength in gold prices – which have increased around 16% from its mid-October lows. The key drivers of this have clearly been the shift in the macro environment, with real yields finding a peak and the US dollar depreciating sharply, something that Morgan Stanley expects is likely to continue.
The Australian dollar (AUD) has strengthened noticeably since its trough of 62c in October. This trend reaccelerated in over December and January, helped by the positive sentiment from China's reopening and corresponding commodity price implications. It also meant that Australia's 10 Year yield spread with the US closed and moved positive again for the first time since September. This reduced yield premium was a key reason Morgan Stanley’s US rates team noted a sharp weakening in the broad USD over this time. As such, the AUD has appreciated much more quickly than expected. The higher AUD will mechanically be helpful for imports and a headwind for exports. However, the AUD remains quite low in historical terms and so will still be relatively supportive for offshore earners.
In Morgan Stanley’s 2023 outlook back in November last year, we emphasised the need for investors to consider what we saw as several important peaks in global macro drivers – with 2023 a year of less growth, inflation, and central bank tightening. While inflation does look likely to trace down back towards targets over coming months, central banks overall remain relatively cautious on the outlook, and while economies are slowing, the pace is measured so far.
For more on Morgan Stanley’s outlook for 2023, speak to your Morgan Stanley financial adviser or representative.