Rougher seas ahead

In light of the events of recent weeks, Pictet Wealth Management’s CIO Office & Macro Research team has prepared a Flash Note that laying out its views about the macroeconomic outlook. The Flash Note addresses specifically the following frequently asked questions:

- What’s next for the Federal Reserve after another strong consumer inflation report?

- Where are energy prices heading after the OPEC+ production cut?

- Will China’s growth outlook finally improve?

- What options do the UK government and Bank of England have?

- Will the EU agree on common energy price caps?

- Can euro area governments soften recession without fuelling inflation?

- How much could Italian government bond spreads widen?

Overall, downside risks abound. These include persistently high inflation that is fuelling continued central bank hawkishness, concerns over financial stability, a policy drama in the UK, the escalation of Russia’s war in Ukraine, and the never-ending negotiations over energy price caps in Europe. Still, among our conclusions, we maintain our high-level conviction that core goods inflation will decline sharply in the coming months, and that the Fed will eventually adopt a more cautious policy approach--although it may reach a higher terminal rate than initially expected. 

We expect all fossil fuel prices (gas, oil, coal) to remain elevated in 2023. At the same time, we think EU leaders may agree on a common energy price strategy by the end of this month. We expect leading indicators to weaken further in the euro area and the EU at large, and labour market conditions to start deteriorating soon. Nonetheless, The European Central Bank is likely to hike the deposit rate to 2% by December (we expect 75bps in October, and 50bps in December), before reassessing the situation. We had previously expected a 75bps hike at the 3 November meeting, but we think the Bank of England could front-load its tightening with a 100bps move.