01. INFLATION GAUGES
The official 12-month inflation gauges will show marked signs of improvement. However, this doesn’t mean prices are coming down. It means the calculations are replacing much higher monthly numbers from 2022 with lower ones in 2023.
02. FEDERAL RESERVE
By the end of the 2nd quarter, the Federal Reserve should have enough cooler inflation data to pause in raising the overnight lending target. However, this doesn’t mean the Fed will be in a hurry to cut rates.
03. LABOR FORCE
The economic data will be confounding. Regional surveys will continue to be less than impressive. Yet the official labor force data will stay surprisingly strong. Simply put, employers will continue to have a hard time finding capable workers.
Despite all of the fears, the United States will avoid a severe 2008-like recession during this economic cycle. Why? Despite the wobble in the 1st quarter, the U.S. banking system and the U.S. consumer are stronger in 2023 than in 2007.
05. THE MARKETS
The markets and the economy will continue to bounce around to no one’s great satisfaction until we reach the end of this tightening cycle. Once it is clearly over, some sense of normalcy will return. At least what passes for normalcy in 2023.
06. CRUDE OIL
Due to a variety of factors, crude oil prices will remain higher than people like. However, a return to last year’s peak levels is very unlikely.
07. THE BANKING SECTOR
There is an expression in politics: “Never let a good crisis go to waste.” Washington takes this to heart and works on new regulatory frameworks for the banking sector. This despite the fact almost all bank woes begin with failed monetary and/or fiscal policies.
U.S. public support for supplying Kyiv will start to wane. Spending untold billions to force a never-ending stalemate in Eastern Europe starts to drain John Q. Public’s enthusiasm. He has bills to pay.
The rift between the “global north” and the “global south” will continue to widen. Former developing nations and emerging markets will look toward each other
for economic solutions, as opposed to the West. India will take a large, geopolitical role in this regard.
Russia will reverse-engineer U.S.-donated munitions it captures in its war with Ukraine. While progress will be slow, the Kremlin will eventually be able to narrow the technology gap it has with NATO. China and Iran will also likely benefit from this.
11. THE CROWN
The coronation of Charles III will provide all the pomp and circumstance many love about the British crown. However, due to a persistently sluggish economy, the average Briton will start to seriously question the concept of monarchy and the money it takes to support it.
12. TAX FLIGHT
Discontent with political elites and the managerial class will continue to simmer, leading to a growing exodus of people from higher-tax states to lower-tax states. Instead of changing their ways, politicians in the former will double down on policies that alienate much of their population.
Because of March’s banking crisis, lenders will likely slow the pace of loan growth in the United States. As a result, the Federal Reserve probably won’t have to
be as aggressive as originally feared. Interestingly, the system’s reactions to problems the Fed helped engineer will ultimately do the Fed’s work for it.
This content is part of our quarterly outlook and overview. For more of our perspective on this quarter’s economy, inflation, bonds, equities and allocation, read our entire 1st Quarter 2023 Macro & Market Perspectives.