1. Research
29. September 2022
Since our last House View in June, the economic and market outlook has deteriorated dramatically. We are in the midst of a historic bursting of the bond bubble, and a once-in-a-generation equity revaluation, combined with a sustained flight into the USD. The latter has been driven by geopolitical consideration as well as the failure of the ECB and the BoE to act as decisively on inflation as the Fed. Our street-leading prediction of a US recession by end-2023 has become increasingly mainstream, and we also expect the Euro Area and German economy to contract by at least -2% and -3% respectively next year. [mehr]
Deutsche Bank Research The house view: snapshot Shipwrecked #PositiveImpact World - The global outlook is moving in a stagflationary direction. - Inflation momentum has continued to build, leading to central bank tightening that will slow growth across the key economies. - Russia's invasion of Ukraine has disrupted key commodity markets and supply chains. China - We forecast 3% GDP growth in 2022. Consumption growth will remain subdued due to more restrictive Covid-19 containment measures. - Covid-19 remains the biggest downside risk to the near term growth outlook. Despite rising commodity prices, subdued wage growth and domestic demand cushioned pass-through of price inflation. - Additional policy support will be needed in H2 2022. Macro views United States - The fallout from Fed tightening will likely tip the economy into recession in H2 2023, with risks skewed towards an earlier and deeper recession. That will also lead to a higher unemployment rate, which peaks above 5.5% in Q4 2023. - Upside suprises on inflation means we expect CPI to end the year at +7.2% (Q4/Q4), and core CPI at 6.2%. We then anticipate headline CPI to fall back to 3.9% and core back to 3.8% by end-2023. - We expect the Fed to continue its aggressive hiking cycle, with a 75bp hike in November, followed by 50bp in December, hitting its peak at just under 5% in Q1 2023. Germany - With Germany most exposed to the gas supply constraint, we have cut our 2023 GDP forecast from -1% to a drop of 3-4%. - German inflation in 2023 is likely to come in at the lower end of our original 8% to 12% range, with possible price caps on wholesale energy markets and temporary VAT reduction on gas purchases dampening inflation pressures. Europe - We expect a deep winter recession in Europe, following the indefinite closure of the Nord Stream 1 pipeline, escalation of the Ukrainian conflict and pass-through effects of tighter monetary policy. Emerging markets - Emerging markets face many headwinds, including aggressive tightening by DM central banks, and downside risks to China growth. However, drivers of inflation are becoming more domestic/idiosyncratic. - China's struggle with its zero Covid strategy continues to be a significant drag on Asia's performance relative to other EMs. - LatAm is furthest ahead in normalising policy settings, with focus shifting to the political cycle. Political risks remain key downside. - CEEMEA is highly differentiated as a region. CE3 is most at risk from Ukraine developments; South Africa a balance between better terms of trade and a gradualist central bank; Turkey still subject to large policy unpredictability. Key downside risks Deutsche Bank AG/London The views expressed above accurately reflect the personal views of the authors. The authors have not and will not receive any compensation for providing a specific recommendation or view. Investors should consider this report as only a single factor in making their investment decision. Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors. FOR OTHER IMPORTANT DISCLOSURES PLEASE VISIT https://research.db.com/Research/Disclosures/FICCDisclosures MCI (P) 051/04/2022. UNTIL 19th MARCH 2021 INCOMPLETE DISCLOSURE INFORMATION MAY HAVE BEEN DISPLAYED, PLEASE SEE https://research.db.com/Research/Disclosures/Disclaimer FOR FURTHER DETAILS. marion.laboure@db.com henry-f.allen@db.com jim.reid@db.com September, 2022 thehouseview@list.db.com http://houseview.research.db.com Higher-than-expected inflation - If expectations become unanchored and inflation does not recede as expected, this would likely necessitate even more aggressive central bank tightening and a deeper economic slowdown/recession. Earlier than expected US recession - We expect a US recession in H2 2023, but the risk is that comes earlier. Escalation in Ukraine - Downside scenarios centre on stronger aggression by Russia following Ukrainian military success, and the intensification of Russia's energy war with Europe following the close of the Nord Stream 1 pipeline. M H M - We downgraded our euro area GDP forecast for 2023 from -0.3% to -2.2%. Headline HICP forecasts for 2023 remain high at 6.2% and core inflation forecasts at 4%. The ECB's hiking cycle will continue, with an expected 75bp hike in October, 50bp in December, before reaching 2.5% terminal rate in March 2023. GDP growth (%) Central bank policy rate (%) Key market forecasts 2022F 2023F Current Q2-22 Q4-22 Current Q4-22 Global 3.1 2.2 US: federal funds rate 3.125 4.375 4.875 US 10Y yield (%) 3.92 3.85 US 1.9 0.6 Eurozone: deposit facility rate 0.75 2.00 2.50 EUR 10Y yield (%) 2.12 2.05 Eurozone 2.9 -2.2 Japan: policy balance rate -0.10 -0.10 -0.10 S&P 500 3655 4750 Germany 1.0 -3.5 UK: bank rate 2.25 3.25 3.75 Gold (USD/oz) 1629 1750 Japan 1.4 0.9 China: MLF 1Y interest rate 2.75 2.75 2.75 Oil WTI (USD/bbl) 76.7 96.0 UK 3.5 0.0 Oil Brent (USD/bbl) 84.1 100.0 China 3.0 5.0 The house view: snapshot (continued) September, 2022 Market views - Expecting 10yr UST at 3.85% by year-end. Recent editions Rates % October 2022 November 2022 December 2022 20-21 EU European Council Meeting 02 US Federal Reserve Decision 14 US Federal Reserve Decision 27 EZ ECB Decision 03 UK BoE Decision 15 UK BoE Decision 28 JN BoJ Decision 20-21 EU European Council Meeting 15 EZ ECB Decision 2022 Macro events calendar - Difficulties ahead as US enters recession in 2023. - Equities should recover towards year-end. But the US recession in 2023 should lead to further market disruption, including wider credit spreads. Market Sentiment - BoJ: No change in rates. - PBoC: No change in rates. Monetary Policy Key macro & markets forecasts Equities - Expecting a recovery over the rest of 2022. - Our year-end 2022 target sees the S&P 500 at 4750. - At the sector level, we see the rebound led by financials, megacap growth, and technology. Credit - Spreads should widen materially in Q2 23 and hit wides as a US recession takes hold. - Our YE 2022 forecast for credit spreads sees a moderate amount of tightening from here across both IG and HY markets. - But then we see a widening in spreads as we reach 2023 and the US recession hits. Oil - Brent prices to end 2022 at $100/bbl. - After that, we see prices falling back to $95/bbl in Q2 2023, and $90/bbl in Q3/Q4 2023, before falling further to $85/bbl in 2024. - A higher interruption to Russian supply as foreseen by the IEA would likely result in Brent prices revisiting $120/bbl. - Expecting 10yr UST at 3.85% by year-end. - This reflects a view that market pricing is plausibly high enough for the Fed for the first time in a while. - Fed: 75bps hike in November, followed by 50bps (Dec), and then 25bps from December, taking the terminal Fed funds up to near 5% in Q1 2023. - ECB: 75bps hike in October, and then 50 bps in December, reaching a terminal deposit rate of 2.5% in March 2023. - BoE: 75bp move in November, a 50bp move in Dec, 25bps in Feb and March, with terminal rate at 4%. - Shipwreked 28 September 2022 - The gathering storm 22 June 2022 - Prepare for hard landing 20 April 2022 - Navigatin g perilous waters 11 January 2022