Like the Weather, Markets are Hard to Predict

Tom Reilly

09.11.2023

Like the Weather, Markets are Hard to Predict

Cutting the grass recently, for what felt like the hundredth time this summer, transported me back to a moment 14 months ago. It was my daughter’s birthday on June 21, and it had rained all week. Her Mum wanted the grass cut to facilitate the Gazebo that was going up in the back garden. The grass was too wet to cut – my view at least – but Mum was having none of it, and so on June 19, the lawnmower made its appearance. I never cut the grass again in 2022!

 

We then went on holiday to Baltimore, West Cork, in August, where we spent 2 weeks on the beach in glorious sunshine. Fast forward a year, and the lawn mower is out every weekend and we spent two weeks in the rain in West Cork.

 

Climate change perhaps? But it shows is that you can’t plan anything with any certainty in Ireland. What will it be like next year? Can we predict markets with any more certainty? Probably not. So, what may or may not happen to economies and interest rates over the next 12 months?

 

The USA

Will Trump be in the White House, or will he be in jail? He’s still odds on for the Republican nomination and only 2/1 odds of reclaiming the presidency. So, the betting suggests if he’s not in jail he stands a strong chance of being President, which says a lot about Biden and the Democrats.

 

Is there an alternative to Biden though? It doesn’t appear so, as he has a 1/3 lead for the Democrat nomination. However, his biographer said recently it wouldn’t be a “total shock” if he dropped out of the race. Who has Michelle’s number?

 

Will the economy go into recession as the unprecedented increase in interest rates starts to take hold? The market for now says yes, with a recent Bloomberg poll giving the chances of a US recession at 60%. However, the Goldman Sachs team has revised their earlier forecast from a 20% to a 15% chance of recession. Why? Because the labour market remains so strong, it will lead to consumer disposable income reaccelerating in 2024. They add that they expect the drag on the economy from the Fed’s tightening policy to have vanished entirely by early 2024.

 

What does that mean for interest rates? Well, we are near the end of the hiking cycle, no doubt about that. Inflation is falling and has been for a while. Manufacturing is weak and the services sector is starting to slow, which should suggest lower inflation numbers going forward.

 

Will that continue though? Or will the recent resurgence in oil and commodity prices filter through and keep the core number “sticky”? The market seems to think not, as the chart below suggests, with 100bps of rate cuts priced in from mid-2024 to the start of 2025.

 


Source: Bloomberg

 

 

Europe

The ECB was too slow to start raising rates, insisting inflation was “transitory.” Do we now run the risk that they go too far? Probably. Staff forecast on September 14 moved their inflation forecast higher and, as a result, we got another 25bps hike.

 

Recent PMI data for the zone suggests that the economy is teetering on the edge of recession, with the biggest economy of them all, Germany, in a particularly bad way. There appears to be a good divide between the North and South on the ECB council, with the hawks focusing on the still “sticky” core inflation numbers while the doves are warning that recession is coming.

 

As an ex-colleague of mine always used to say, “When the US sneezes, the rest of the world catches a cold.” This appears to be the case again with the market suggesting the ECB are pretty much done, as the table below shows. But will energy prices be the spanner in the works for the ECB, whose only mandate is inflation?

 

Source: Bloomberg

 

 

What can we predict?

Well, none of the following: Will Trump go to jail? Will Biden drop out of the race? Will the US go into recession? Will Europe go into recession? When will the Fed cut rates or when will the ECB cut rates? What will the weather be like in Ireland next summer? How often will I have to cut the grass?

 

All of the above are uncertain. BUT the following is fact, barring a Sovereign Default: The Irish Government Bond the 0.2% 05/2027 is trading at around 90.00 and the Irish Government Bond the 0% 10/2031 is trading at 78.00. Where will they be trading next week, next month or, next year? Who knows. But on May 15, 2027, the 27s will redeem at 100.00, and on October 18, 2031, the 31s will do the same.

 

Give your Cantor Broker a call and, hopefully, the sun shines on your investments – and my back garden.

 

Warning

Past performance is not indicative of future performance.

Warning

The value of your investment may go down as well as up. You may get back less than you invest.