US outlook : The Coming Stagflation Light
By Steen Jakobsen, Chief Investment Officer at Saxo
SaxoStrats is changing its outlook for the US from non-recession to stagflation, and this has consequences for our outlook for interest rates and stock markets. SaxoStrats now call for a stagflation light to begin in Q4 2023, with its major impact in Q1/Q2 2024.
Summary
- The US and global economy are entering a stagflation light period.
- We see a 1/3 chance of the Fed and ECB cutting interest rates this year, and a 2/3 chance of cuts in Q1-Q2 2024.
- We target the S&P 500 at 4,455 in the short term and 4,045-50 in the long term.
- Q3 and Q4 will be hard on corporate earnings as top-line growth comes down while input costs (wages and energy) continue to be elevated. Margin compression is expected. Q3 results in Q4 should be a turning point.
- Modern Monetary Theory (MMT) is the modus operandi of governments and central banks. This needs negative real rates, but the US has positive real rates - a big negative change.
- Emerging markets have started to cut interest rates. EM often leads economic and monetary cycles.
- The US consumer will be severely hit by exhausted savings and extreme cost for doing capital spending.
Conclusion
We believe that the "time is up" for the current economic model. We have had a rolling recession since the exit from stimulus programs, and we now see it moving from global manufacturing to consumer spending. We still see sticky inflation (wages and energy) going forward.
The focus on MMT-like programs and concepts needs to "die" for the economy to regenerate and move towards productivity. The recent positive real rates are a good sign for this, as higher marginal costs of capital will now attract capital better but increase the threshold for return, effectively forcing productivity to be a big share of the investment.
As a result, we believe that stagflation lite is now a very real possibility. This will mean that the US will experience a period of high inflation and slow economic growth. This will be a difficult period for the US economy, but it is something that we believe is unavoidable.
So it's time for policy makers to be afraid of the answers to their questions: Debt is not free, economies do not grow from lack of productivity, and you cannot just leave voters and economic agents behind while the government's hand increases.
This coming stagflation will be a positive step towards resetting the economy to focus on the real challenges: better, cleaner energy, a bigger real economy, and much better education and social policies.
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