Three Observations from the Start of the Quarter
A change is going to come? Global central banks are not ready to change course yet, but it seems like we may be getting closer to an inflection point. Earlier last month, the Reserve Bank of Australia opted for a 0.25% rate hike when the market had expected 0.50%. The board referenced the substantial increase in its policy rate over the last few months as a reason for a smaller hike. Meanwhile, the chorus of doves is growing. The United Nations Conference on Trade and Development called on the Federal Reserve to stop raising rates because it raises risks to more vulnerable emerging economies. We think the bar for the Fed to strike a more conciliatory tone is very high, but at the margin, there does seem to be more focus on the risks of doing too much. Still, markets are expecting the fed funds rate to rise toward about 4.5% by March. Remember: The Fed was clear in that it must see a convincing series of data to even begin entertaining a pivot in its policy. Until this happens, it’s probably too soon to believe in sustainable stock market rallies.
Support to energy prices. OPEC+ agreed to output cuts of up to 2 million barrels a day in an effort to keep oil prices elevated through a global demand slowdown. We expect to see a moderate rise in prices over the next 12 months, taking into account persistently tight supply and expectations for slowing global demand. While gasoline prices in the U.S. have risen from their lows, they are still down about 25% from the early summer peak.
Peak globalization may be behind us. For decades, global economies have become increasingly interconnected through trade, technology, and infrastructure. More recently, data shows that peak connectivity growth may be in the rearview. World exports as a percent of global GDP marked a record high in 2008. By this measure, the world hit record globalization around two to three years ago, and relatively cheap labor in emerging market economies (a driver of globalization in previous decades) has become more expensive.
One view is that deglobalization will likely lead to lower productivity and elevated prices that pressure equity returns over the next decade. We’re not so convinced, however. Companies actually have been successful in diversifying and relocating their sources of production. In our view, the potential for short-term pain lends to long-term gain in the form of defense, infrastructure and cybersecurity spending, companies that enable energy transitions, and digital transformation.
Rick Barragan is the Managing Director, Los Angeles Market Manager, for J.P. Morgan Private Bank.
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privatebank.jpmorgan.com/los-angeles
