Market Strategy

• Fourth quarter 2022 US GDP data posted further proof of the resiliency of the US economy.
• We are watching JOLTS and real wages.
• We recommend cash and cash equivalents such as 3- and 6-month T-bills yielding 4.6% – 4.7% as well as short-term investment grade corporate and government debt instruments at this juncture. As we move towards recession, IG should hold up relatively well with favorable financing conditions.

• Global equities have rallied to kick off the year, led by a rotation to recovery stocks even before the recession occurs
• Despite the underperformance so far year-to-date, we prefer holdings positions in those more defensive sectors
• Consensus earnings expectations for 2023 of some 7%  y/y are too optimistic
• EM equities are similarly off to a strong start

Last Sunday riots broke out in the capital city of Brasilia in an apparent political insurrection against the 10/2022 presidential election outcome where former president Lula da Silva won by a razor-thin margin.

The past 14 last-hike-to-first-cut periods in U.S. monetary policy averaged only 4.8 months. Many of the shortest ones were in the 1980s when inflation was high. (However, this is at least in part because high inflation necessitated much more frequent and unpredictable action by the Fed during the 1980s, different from today.)

Mid-terms elections have historically been unkind to the party prevailing in power and we expect this time to be no different. In today’s mid-term elections in the US, the Republicans are very likely to gain seats in both houses of Congress.

The specter of recession is looming large in the minds of policymakers, investors, and households, as inflation has eroded the real purchasing power of households and the Fed signals that it is willing to drop a Volcker-type bomb on the economy in a bid to re-anchor inflation.

Fed Chair Jerome Powell stressed, both in person and through the FOMC statement, the Federal Reserve’s re-discovered commitment to price stability.

Inflation remains well above target across the Latin American region, with Argentina, Chile, and Brazil headline CPI growth figures now well into the double digits. To their credit, central banks did their job and began hiking cycles a year ago with Brazil hiking more than 1000 bps since March of 2021. 

Of the recessionary indicators we follow closely, the majority do not yet point to imminent or near-term recession. Economic contraction is part of the economic cycle, and we maintain our conviction view that we are in decelerating part of the cycle, having reached (and passed) the peak. However, we believe recession is not a 2022 event and much depends on the Fed.

Various consumer confidence measures are showing warning signs on the future performance of the US consumer.

Colombia is faced with a key presidential election in less than two weeks, one which could risk institutional credibility and market sentiment. Brazil has a consequential presidential election in later this year in October.

After risk assets catapulted yesterday, irrationally exuberant over a comment Fed Chair Powell made effectively discarding the idea of 75bp hikes for the time being, today (as Bulltick Research predicted), markets came crashing back down to earth.

Global bonds are set for the worst monthly return they’ve seen in over 30 years, according to data compiled by Bloomberg, posting a negative 4% return so far in April, with 10 days still to go.

Within the emerging markets sphere there are winners and losers in Russia’s war and in the context of Fed hikes and US slowdown. We believe that of the emerging world, Latin America stands to benefit the most both from an economic and market perspective.

The 2-30 yield curve spread briefly turned negative last week, and currently stands in the low single-digits, a clear indicator that market participants are bracing for headwinds to economic growth and market performance.