While we do not expect the US Federal Reserve to pivot any time soon towards easing policy, the firm break in dollar momentum perhaps reflects a shift in the relative growth story which had favoured the US towards one focused on the rest of the world centred around improving China demand.
We don’t expect smooth sailing for the global economy and markets, but there should be great relief for both stocks and bonds in 2023, with pockets of strong outperformance due to idiosyncratic advantages. Notably, Europe and Developed Pacific-ex Japan should be overweighed for equites for the next six months, but Japan should perform the best by next December.
We are more positive on duration overall, on the assessment that we are likely past peak hawkishness from the Federal Reserve and other developed market central banks. We favour Singapore and South Korean government bonds, given their relatively higher sensitivity to stabilising US Treasury yields.
In what was probably the best kept secret of many years, the BOJ unanimously agreed to shift its YCC policy well before virtually any economist or market watcher expected. The largest question people seem to have is “why now?”. As with most major decisions, the answer was likely a confluence of several important items.
This month we discuss the prospects of Japanese equities remaining well-supported into 2023 thanks to robust exports and inbound demand. We also explain why the markets are looking beyond a dip in Japan’s 3Q GDP, focusing instead on the prospect of growth resuming.
The just-released 3Q CY22 data on aggregate corporate profits in Japan was very positive, with the overall corporate recurring pre-tax profit margin hitting a record high on a four quarter average.
China’s bond market is exhibiting low correlation to other asset classes, displaying historically lower volatility, enjoying continued internationalisation of the renminbi and benefitting from the country being included in globally recognised indices.
This month, Fed Chair Powell seemed hellbent on quashing any last hope of a pivot or at least slowing the pace of rate hikes sometime soon. But this crushing blow to hope helped sow the seeds of an eyewatering rally when one inflation print showed some promise—hence, the manic cycle continues.
The ASEAN region fared better on the whole in October thanks to gains by the Philippines and Malaysia; Hong Kong and Taiwan stocks were volatile while the China market continued sliding.
We discuss Japan’s recent currency market interventions from an equity market perspective; we also share our thoughts on steadily rising inflation after a surge in the September core CPI.