Q4 2023 Outlook

Outlook Summary:

• Regional Bank Profitability: Expected to decline as interest rates remain elevated for an extended period.
• Credit Issuance: Momentum is projected to continue its decline.
• Central Bank Rates: FED, ECB, and BOE rates are anticipated to peak for this cycle.
• Inflation Pressures: Set to persist above the 2% target unless a regional bank crisis occurs.
• Balance Sheets: Strong corporate and household balance sheets are intensifying core inflation pressures.
• Investment Strategy: Investment grade fixed income is considered attractive relative to broader equities.

Fundamental Overview

During the 3rd quarter, several significant events have unfolded:

• FED's Hawkish Pause: At the recent FOMC meeting, Jerome Powell kept the interest rates steady at 5.5%. He emphasized the Federal Reserve's stance on maintaining higher rates over an extended period, lifting projected interest rates across all years. Notably, their economic forecasts have become more positive:
  • GDP Projection for 2024: Revised upward from 1.1% to 1.5%.
  • Unemployment Rate Predictions for 2024 and 2025: Reduced from 4.5% to 4%.
  • Core PCE Inflation Estimate for 2025: Adjusted upward from 2.2% to 2.3%.
• Core Inflation Rates: On a year-on-year basis, core inflation rates have declined in the Eurozone, Great Britain, Switzerland, and the US. However, Japan has not experienced a decline.
• Japan's Monetary Policy: Remained loose despite inflation becoming entrenched, driving currencies higher against the Japanese yen.
• Germany's Economic Situation: Entered a technical recession, with GDP contracting for two consecutive quarters.
• China's Q2 GDP Growth: Disappointed, coming in at 6.3% versus the expected 7.3% year-on-year growth.

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