Quarterly Letter – Q3 2023: Summer Shift
October 20, 2023
The long-awaited recession has not yet arrived.
The first quarter of 2023 brought evidence that a global slowdown is indeed approaching. But it also showed that there is a way to go before central banks can declare victory in their fight against inflation, and pivot to easier money. Despite these headwinds, investors in equity and bond markets had a good first quarter.
In the United States, the unexpected banking crisis in March – that spilled briefly into Europe – demonstrated that rising interest rates are biting. A credit crunch could result. Cooling labor markets both reflect and reinforce slowing demand. These signs of weakness in Q1 did not deter equity investors in public markets, although bond markets see-sawed violently during the quarter. Traders tried to make sense of confusing and changing economic information and to predict its likely impact on central bank policymakers.
Investors saw two reasons for good cheer. First, hope persists that the Federal Reserve and the European Central Bank will soon ease monetary policy after one or perhaps two more notches higher in interest rates. At the same time, there is a scenario for a weakening US economy that could result in a pause in rate hikes and would make an early pivot towards lower rates more likely. At RockCreek, we continue to believe that such a pivot is unlikely to manifest anytime soon.
The second reason for markets to rally also helps to explain why rates are unlikely to come down quickly. Yes, the global economy is set to slow down. But the US and European economies have shown remarkable resilience in the face of the fastest monetary tightening in decades. Despite gloom from official forecasters at the World Bank and International Monetary Fund (IMF) this month about longer term prospects for the global economy, they believe that growth remained positive in Q1. The IMF’s central forecast is for positive growth overall during 2023.
Looking ahead, we see four macro themes:
August 31, 2023
Last week, leaders from leaders from Brazil, Russia, India, China, and South Africa – formally known as the “BRICS” – assembled in Johannesburg for a (until very recently) largely overlooked three-day summit to discuss expanding the bloc’s membership and moving away from US-dollar dominance. The outcome of the meeting was a major milestone for the otherwise economically and politically disparate group.