Will inflation remain high? Will unemployment remain low? Will stocks and bonds see another year of significant negative returns, or will they rebound? These are some of the important questions that I unpack in this latest report, which provides my 2023 outlook for the US economy & its financial markets.
There are two forces pulling on bond prices. Yes, if inflation goes down, bond prices are likely to go up as buyers come back. A tanking stock market combined with low inflation will also make bonds attractive.
But what is the effect of QT and the fed shrinking their balance sheet on bond prices? They're not doing a lot of outright selling. Instead they're letting the bonds they do own mature and simply let them roll off.
Since the Fed is not buying, somebody else must buy. We're still running big deficits. So more supply and less demand implies lower prices and higher yields. These two forces will push and pull the bond market in opposite directions. How do you reconcile this? Why do you think there will be more buyers to absorb the bonds now that Fed is not buying?
QT has been running since June 2022, and bond yields have fallen materially since October. I expect this trend to continue across 2023 as inflation falls & recession concerns rise.
The other key thing to note is that as the Fed's focus turns to economic growth as inflation falls, just as I outlined my expectation for interest rate cuts, QT is also likely to end and eventually be replaced by another installment of QE.
I think that CPI data will again certainly be a very important metric for markets during 2023. The CPI story is likely to be ongoing disinflation, which markets may initially interpret very positively as they await a Fed pivot. The problem is, the horribly lagging nature of Fed policy is setting the US up for a severe recession. Once this reality begins to set in, I expect stocks to then decline.
Excellent macro overview, thanks for writing.
Thank you!
There are two forces pulling on bond prices. Yes, if inflation goes down, bond prices are likely to go up as buyers come back. A tanking stock market combined with low inflation will also make bonds attractive.
But what is the effect of QT and the fed shrinking their balance sheet on bond prices? They're not doing a lot of outright selling. Instead they're letting the bonds they do own mature and simply let them roll off.
Since the Fed is not buying, somebody else must buy. We're still running big deficits. So more supply and less demand implies lower prices and higher yields. These two forces will push and pull the bond market in opposite directions. How do you reconcile this? Why do you think there will be more buyers to absorb the bonds now that Fed is not buying?
QT has been running since June 2022, and bond yields have fallen materially since October. I expect this trend to continue across 2023 as inflation falls & recession concerns rise.
The other key thing to note is that as the Fed's focus turns to economic growth as inflation falls, just as I outlined my expectation for interest rate cuts, QT is also likely to end and eventually be replaced by another installment of QE.
Thank you!
I think that CPI data will again certainly be a very important metric for markets during 2023. The CPI story is likely to be ongoing disinflation, which markets may initially interpret very positively as they await a Fed pivot. The problem is, the horribly lagging nature of Fed policy is setting the US up for a severe recession. Once this reality begins to set in, I expect stocks to then decline.