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Monday 08 May 2023
Cross Asset
May 2023 | Investor sentiment is downbeat, but not overly bearish. With tightening credit conditions, our US growth outlook is lower compared to that of the International Monetary Fund (IMF), while we are more optimistic on China. This supports a cautious stance and a search for opportunities across the emerging world. There are some signs of complacency on Europe, while debates were mostly focused on geo-economic fragmentation and the urgency of policy action regarding crisis management and to secure artificial intelligence development.
01 | Our base scenario is largely aligned with the scenario showcased by the International Monetary Fund (IMF): Inflation should prove stickier and stay above central bank targets for longer.
02 | There was a wide consensus about markets currently pricing in too many Fed rate cuts that confirms our positive view on US duration.
03 | Real bond yields are higher than they were before the pandemic, but are likely to return to pre-COVID levels in the medium term, when inflation returns to major central banks' 2% target.
Important Information
Unless otherwise stated, all information contained in this document is from Amundi Asset Management US (Amundi US) and is as of May 08, 2023. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi US and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results. Amundi Asset Management US is the US business of the Amundi Asset Management group of companies.
After a strong close to 2023 and a resilient first quarter, we expect the US economy to decelerate as we continue through 2024. The most vulnerable segments of the economy are showing signs of stress, although data on the broader economy remain mixed. We continue to expect inflation to moderate amid some volatility, particularly on the sticky services side, as domestic demand cools. We acknowledge the trend strength in risk assets, but high valuations are preventing us from massively shifting our risk gear upwards. The equity rally is broadening and we see a rotation towards European equities, where we have now a neutral stance.
In January we had some upside surprises, encompassing import prices, producer prices, both the headline and core Consumer Price Index, and the Personal Consumption Expenditure deflator. We think prices were in part boosted by seasonal factors which are not fully accounted for in the usual seasonal adjustment. The weakness in January retail sales and a downward revision of November and December readings signal, in our opinion, a potential downshift in consumer spending. Credit card and auto loan delinquency rates continue to rise according to the New York Fed report; consumption so far has been supported by the depletion of excess savings but US households have also taken on more debt, and some of those loans are becoming delinquent, especially credit card and auto loans, which are now above pre-COVID levels.
Three key arguments support the Japanese market: (1) A recovery in profits (2) A strong incentive from the Tokyo Stock Exchange for companies to improve their capital efficiency and (3) The shift out of deflation is boosting a market rerating. The risks to these positive arguments are mostly linked to the yen. A strong comeback by the yen, should global equity volatility increase sufficiently in 2024 to encourage the unwinding of carry trades, would weigh on the performance of Japan's equities in local currency It would penalize profits and, everything else being equal, slow the process of increasing inflation, weighing on valuations at the same time.
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