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Client Update - 20th January 2023

This week we have been watching and listening to various global Chief Executive Officers (CEO’s) talking about their companies and the global economy at the World Economic Forum in Davos. Whilst they could possibly be talking up their own book, many of the CEO’s sound quite positive about the year ahead and view the inflation dynamic as already changing.

For many years we have seen inflation targeted at 2% and various apologies made when this target was missed. The last twelve months has seen inflation breach double figures in the UK and now that it is starting to slowly recede, there is already talk around reaching a new target. The new world post the Great Financial Crisis and the Covid pandemic is struggling to cope with the concept of a tightening in liquidity and higher interest rates, despite the huge quantity of debt on the global stage. Discussions this week centred on perhaps 4% is the new 2% - i.e. inflation is expected to steadily fall to 4%, but to get the rate down consistently to 2%, may require a dose of tightening that may well be too painful to stomach.

Not everyone is talking favourably about a fall in the global rate of inflation. Developed market central bankers took another opportunity this week to reinforce their aggressive stance on raising rates to tackle inflation. European Central Bank president Christine Lagarde warned that further big rate rises lay ahead in comments later echoed by a top official at the US Federal Reserve. “We shall stay the course until . . . we can return inflation to 2 per cent in a timely manner,” the ECB president said in a panel discussion at the World Economic Forum, adding financial markets should “revise their position” that the bank would soon slow down its rate rises in response to signs that eurozone inflation has peaked. Then last night Lael Brainard, the vice-chair of the US Federal Reserve, signalled that the US central bank also had more to do to get inflation closer to its 2 per cent target, despite signs that consumer spending is starting to ebb, the labour market is cooling and price pressures have eased. “Inflation is high, and it will take time and resolve to get it back down to 2 per cent. We are determined to stay the course,” Brainard said at an event hosted by the University of Chicago. It looks like CEO’s are talking about 4% being the new 2%, but central banks are in firm disagreement for now.

Just how much debt we have in the global economy was underlined by news that the US Government has now hit its debt ceiling of $31.4tn. The debt ceiling is the legal limit on how much the federal government can borrow. The cap is set by Congress, and was last extended in December 2021 to $31.4tn after Republican Senate minority leader Mitch McConnell capitulated to demands from the Democrats, who controlled the White House and both chambers of Congress at the time. But now, with Republicans controlling the House of Representatives and Democrats in charge in the Senate, the ceiling needs to be lifted again if the government is going to keep honouring its payments and avert a default. While leaders from both parties insist that they will work to avoid the worst-case scenario, fears of a default have risen sharply in Washington this year amid threats from some House Republicans to use the debt ceiling debate as leverage for other policy changes, namely big budget cuts.

We wrote last week about the interesting investment story developing in China as it continues to support its economy post the reopening from its zero Covid policy. China’s return should also be considered in the wider context of inflation. In the past, China was seen as deflationary to the global market, as it pushed out low cost products to the global market and a super cheap labour force. Now, with the markets reopening, its consumption of commodities and natural gas may well prove to be inflationary.

Whoever is proved right in the fight to cool inflation in 2023 and also provide a soft landing to economies, we have lots of interesting opportunities in front of us for our clients, so fasten your seatbelts for another interesting year ahead. Sorry Rishi.

Do have a good weekend.

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