By Peter De Coensel,


    • 2023 started with mixed signals across fixed income and equity markets. The rotation towards fixed income product has started though.
    • Policy mistakes lure around the corner.
    • A replacement of the inflation-worry narrative into a growth-worry narrative is imminent.
    • Highly cyclical sectors are worried.
    • Energy supply outpaces demand. This component has good predictive value and will accompany global inflation lower.


It is mandatory for financial market service providers to warn that past performance is no guarantee of future results. The first two months of 2023 have provided a perfect example of this disclaimer across equity and fixed income markets. Across most fixed income sectors a solid January performance scorecard got wiped out in February and early March. Luckily, stellar equity performances over January proved stickier over the past 4 weeks. European equity stands out over Q4 2022 as valuation indicators troughed and investors piled in. On the contrary, the hurdles for (long-duration) technology-heavy US indices have been higher as the FED was leading the monetary tightening charge. As a result, the US equity risk premium is far lower, around 1.75%, compared to the EU equity risk premium holding up at a decent 3.50%.

The rotation in favour of fixed income versus equity is well underway in the US. In US Treasury rates, 5Y5Y forward rates made a high at 4.15% on October 24, 2022. Currently we sit at 3.61%. The inversion of the US Treasury yield curve strengthened over the past four and a half months (10-year versus 2-year went from 25bp inversion to 90bp inversion today) as estimates of US terminal policy rates eked higher by about 75bp from 4.75% to 5.50%. The jury is still out on whether such expectations will effectively be realised. One or two economic indicators that spell trouble could lead to a fast reassessment by the FED as they play and manage the last innings of a fast and steep 2022-2023 hiking program. It’s worth pausing for a moment to consider the arguments used by central banks such as the Bank of England, the Bank of Canada or the central bank of South Korea deciding to pause. They assess that lags are long and variable as we move out of a shock-heavy period and expect inflation to soften. If the US FED walks the talk as priced by markets – taking policy rates to 5.50% – a hard landing might ensue.

One should always be careful with comparisons to previous cycles. Even so, remember how markets derated between 2000 and early 2003 as the internet bubble deflated. The FED was late to adjust from peak policy rates at 6.5%, dropping to 1% mid-2003. The FED accommodation did not prevent the S&P 500 from going into a three-year tailspin, cratering 10%, 13% and 23% respectively over those three years before the equity bear troughed. The message is the following: the moment a policy mistake is made, adjusting policy rates lower could turn out to be ineffective. The moment stretched financial conditions impact medium and long-term corporate investment (opex, capex) decisions, natural spirits are stifled. Wait-and-see behaviour takes over. It is fair to contend that zero and negative policy rates might have led to capital misallocation. However, current normalised policy rate levels should bring sensibility back. In the meantime, the US institutional investor base, joined by a growing retail public, is piling into attractive short end 6-month T-Bills just above 5.00% or 2-year Treasury bonds at 4.85%. Moreover, between October 24, 2022 and today, the Bloomberg Barclays US Treasury index still puts in a decent total return of 3.12% in USD terms. The correction over February provides another chance for global investors to lock-in decent US risk-free returns.

EU financial market participants are yet to engage in this rotation as consensus calls for sticky (services) inflation. A February EU inflation reading at 8.5% YoY against 8.3% consensus pushed the guiding 10-year German bund rate to a 2.77% high on March 2. This translated in a near perfect double top on the 5Y5Y German forward rate that day, compared to October 21, 2022 at 2.65%. In layman terms, the European government bond market is still trying to find a clearing level that will convince long-term institutional investors to step in ‘en masse’. Interestingly, the Belgian February YoY inflation number was an outlier to the downside at 6.6%. Belgium economic indicators are often guiding across Europe. US inflation peaks have been reached over H1 2022. Europe put in inflation peaks over H2 2022.

Fact is that companies are putting funding conditions in their capital strategy not seen in 20 odd years. At the level of European SMEs, approximately 20% of credit lines require refinancing per year. That will hurt profit margins. Large cap companies, tapping European capital markets, have been able to lengthen the average maturity of their long-term debt. A gentle nod and thanks to the ECB Corporate Sector Purchase Program is warranted. As the ECB engages in soft Quantitative Tightening (QT) by reinvesting less maturing principal and coupons at a rate of about EUR 15 billion a month, all eyes are on the European banking sector. Will EU non-public banks take the baton and ensure credit growth across public institutions and private corporates? The ECB sponsored free-money party is over.

Some interesting snippets came out this week that reveal a challenging economic outlook:

    • The French shipping giant CMA CGM revealed that a “downturn that began in the second half of 2022 remained at play in 2023, as market conditions in the transport and logistics industry continue to deteriorate.” Notwithstanding that the company generated record profits over 2022, over Q4 2022 they saw their net income halved. The shipping industry is a notoriously cyclical sector. Today, the Drewry WCI composite index of USD 1,859 per 40-foot container is now 82% below the peak of USD 10,377 reached in September 2021. It is 31% lower than the 10-year average of USD 2,692, indicating a return to more normal prices, but remains 31% higher than average 2019 (pre-pandemic) rates of USD 1,420. Another interesting indicator to track is the Global Supply Chain Pressure (GSCP) index issued by the NY FED. The index continues to trend lower – end of January at 0.95 – closing in on pre-pandemic levels. The index combines variables from several indices in transportation and manufacturing, such as those related to delivery times, prices, and inventory. The index strips out demand-related factors. However when considering falling demand resulting from aggressive monetary tightening, further deflationary pressures might persist across Baltic Dry, Dirty, Shanghai Shipping Export Composite or the above WCI composite index.
    • As we reach the end of winter across the US and the EU, reduced gas demand, due to mild winter conditions, is about to lead to storage congestion. In the US, rig count declines are not visible, possibly creating a supply glut into weakening demand. In Europe, natural gas storage is likely to exit the month of March – i.e. winter – at 55% full. This sets us up to reach 95% full storage levels by end of September. Both will keep natural gas prices at the lower end of current ranges throughout 2023. On top, Chinese coal inventories across 8 Northern ports cumulated to levels not seen since March 2021. Definitely, renewed energy shortage arguments are difficult to point out. Inflation base effects across energy components support a disinflationary narrative over 2023.


As the H1 2023 inflation-worry narrative turns into a H2 2023 growth-worry narrative, expect the demand for fixed income products to trump bond supply. Such a demand-supply imbalance provides support to an outcome of lower long-term government bond rates. We are returning and rotating into an old, pre-GFC, normal. Finally.


Degroof Petercam Asset Management SA/NV l rue Guimard 18, 1040 Brussels, Belgium l RPM/RPR Brussels l TVA BE 0886 223 276 l

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