Global Economic Outlook
Rapidly declining Global real GDP growth with stubborn global inflation, monetary tightening, and a looming crisis defined the year 2022 constraining global demand and supply. The Conference Board Global Leading Economic Index has decreased, increasing the likelihood of a slump. According to the conference board projections, the global GDP will expand by 3.2% in 2022 and 2.1% in 2023. Although 2.1% worldwide growth does not indicate a global recession, it would be the lowest growth rate since 2001 if it were to occur (excluding the global recessions of 2009 and 2020). Tightening Monetary Policy was the most widely used tool around the world with the highest hikes seen during Q3 eroding consumers’ income as they faced higher borrowing costs and living expenses reflected in subdued retail sales.
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Figure 1: Change in interest rates in basis points during 2022|Source: Bloomberg (2022
United States of America : Even though the United States of America suffered from inflation during the year, and recession expectations rose, it remained resilient with the proper monetary and fiscal stimulus. During Q4, relatively better economic Indicators caused a slower pace of interest rate hikes with the economy beating expectations and expanding by 2.6% y-o-y during Q3 after two consecutive quarters of contraction mostly reinforced by consumption and exports. However, it is expected that US GDP Growth was 1.1% during Q4 with the official release by the Bureau of Economic Research on Jan. 26, as the figure below.
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Figure 2 Seasonally adjusted annual rate of change in US Real GDP changes: Actual Vs. Expected based on Investing.com
For stock investors, the return of a higher risk-free rate has significant ramifications because a hawkish Fed intends to keep rates higher for longer. Because of higher rates and a worse economy, it is now more important than ever to check a company’s fundamentals when investing. Moreover, the futures market is pricing in a rate reduction for the end of the year despite repeated statements from the Fed that it intends to "hike and hold" rates through 2023, as seen in figure 2. Also, the Treasury Inflation-Protected Securities (TIPS) market's inverted yield curve and low implied inflation expectations readings indicate that investors predict slower growth and declining price pressures in the first half of 2023.
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Figure 3: Fed Funds Implied Rate based on Bloomberg (2022)
United Kingdom: Retail energy prices and soaring food costs in the UK caused living expenses in the UK to soar. Bank of England (BOE) increased the key rate nine times consecutively with expected future hikes. The BoE raised its benchmark interest rate by 0.5 percentage points to a 14-year high of 3.5%. The Monetary Policy Committee warned "further increases" might be needed to control inflation. Furthermore, the BoE predicted that the economy would fall by 0.1% in Q4, which was less than its earlier estimate from November, which had proposed a 0.3% contraction. According to forecasts, UK inflation will peak at 9.1% in 2022 and then decline to 7.3% in 2023. At the start of Q4 2022, the inflation rate rose to a level not seen in 41 years. The proposed increase in the energy price cap in April 2023 may cause a further rise in headline inflation even if price pressures are expected to ease in 2023 as a result of declining private consumption and lower economic activity.
Euro Area : “Please turn on the heater”…an imminent energy crisis and deteriorating terms of trade trickled down inflation on the economy to unprecedented figures in the Eurozone reaching 9.9% in September, peaking in October to 10.6%, and then slowing down to 10.1% in November’22, and It is expected to furtherly decline to 9.8% in December with the hope that it is on its way to retrace back around the central bank’s mandate of 2% level during 2024 and 2025. The energy crisis due to the Russian-Ukrainian war has negatively impacted the area’s economic growth in which Euromonitor International baseline economic forecasts the Eurozone GDP growth rate to be 2.6% in 2022 and radically slow down to 0.6% in 2023. The end of this quarter is projected to see the interest rate in the Euro Area at 2.50% and trending around 3.50% in 2023 and 2.75% in 2024 according to Trading Economics global macro estimation models. Germany, Italy, and Spain, heavily reliant on energy, are projected to have larger price increases in 2022, with inflation anticipated at 8.0%, 7.4%, and 8.6%, respectively, according to Euromonitor. However, the inflation rate is expected to decline to 6.6% in Germany, 3.5% in Italy, and 3.8% in Spain in 2023. The rise in energy prices has raised inflationary pressures in France as well. However, it is anticipated that in 2023, French inflation would moderate to 3.5%. As fiscal measures intended to limit the growth of energy prices for households will expire by the end of 2022, energy-related price pressures in the eurozone could worsen in 2023.
China:A housing market crunch, high youth unemployment levels, weak domestic demand due to zero Covid policy, Covid-19 resurgence, heatwaves and droughts, and low exposure to globalization are key factors to slow economic growth and a slowing inflation rate in China unlike the rest of the world. According to the People’s Bank of China (BOC), China's GDP is expected to have increased by 3.8% in Q3, up roughly 3.4 percentage points from Q2, and for Q4 and overall, the GDP expanded by 3.9% in Q4 exceeding expectations, respectively. Chinese authorities started relaxing the covid-related restrictions as its domino effect caused a Chinese disorder. The goal of the pro-growth policy should find a balance between stable growth and fiscal viability by concentrating on stabilizing domestic demand and expectations. The BOC reduced the reserve requirement ratio for many banks by 25 basis points injecting 500B Yuan which is around $70B more liquidity into the economy aiming to steer the economy’s wheel.
With China, being the most industrialized country in the world, easing its restrictions, it would be paving the road to global supply chain recovery as could be seen in the prices of commodities rising after the December announcement. Century Aluminum Co. hiked 23%, the most in six years, while top US producer Alcoa Corp. surged as much as 16%. Offshore oil and gas driller Transocean Ltd. added as much as 14% and oil refiner Phillips 66 climbed 5.6% to the highest since January 2020.
Japan: For the first time in 24 years, the Japanese government interfered in September. Japan sold dollars and bought yen, but the scale of the intervention was not announced. The intervention caused the JPY to appreciate from around $146 to around $140 in a few minutes after the disclosure of the news. Also, the price ceilings on oil helped mute inflation comparatively. But still, wage growth remained weak with negative real wage growth rates seen during 2022. As the year ended, the Bank of Japan (BOJ) abruptly changed a fundamental tenet of its monetary policy. The BOJ is allowing the 10-year bond yields to vary by ±0.5 percentage points of its target of 0 compared to the previous band of ±0.25 percentage points while keeping the interest rates at -0.1% as is. December 2022 was unpleasant for Japan as it experienced the highest inflation rate in 40 years at 3.8% YoY.
US Stocks: On the most important note regarding the fourth quarter, there was a great contradiction in the movement of the main US stock market indices, whose movement was confusing, and its results came to confirm the absence of a clear direction for prices. The following chart (Figure 1) shows the results of the indices during this quarter until the moment of preparing this report:
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(Figure 1)
It shows and confirms the market's lack of a clear direction, and certainly it is a case from which we can conclude how the performance may be during the first quarter of next year, because in the end, the indicators must move in consistency with each other.
Expectations will depend on which of the main indices will be able to pull the rest of the indices in favor of it, in other words, will the Dow Jones index succeed in pulling the rest of the indices in favor of the upside, or will the NASDAQ index succeed in pulling the rest of the indices in favor of the downside.
In the end, when we return to the price chart, we find that these indicators their general trend is still a downtrend, Therefore, the option of the Dow Jones index to pull out the rest of the indicators in favor of the bullish trend will be excluded unless we have new economic indicators and data that may indicate the opposite.
Gold: Gold rose by 9.2% in the fourth quarter of this year, the highest quarterly increase since the first quarter of 2021, this increase was caused by the global central bank's shift to less restrictive monetary policies to avoid a global recession. Following the release of economic data that indicated a decline in economic activity by more than expected such as the decline in U.S Retail sales by 0.6% monthly in November 2022, which is the largest decline so far this year and after Philly Fed Manufacturing Index recorded a negative reading and the lowest since April 2021. Figure 1 shows that gold succeeded during the fourth quarter of this year in breaching a downtrend line that extended since March 2022 and succeeded in continuing to trade above the levels of $1800 an ounce. Currently, the levels close to $1830 an ounce are considered a very important resistance area, we will monitor whether gold is able to target it and if it succeeds we expect this to provide positive momentum for prices. Levels close to $1774 an ounce are considered important support levels for gold movements, if gold breaks these levels, this may provide negative momentum for prices.
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Figure 1: Metatrader5, XAU/USD, CFI Brokerage
Raising interest rates may reduce the attractiveness of gold, which does not give a return, and the US Federal Reserve bank stated in its meeting in December that more interest rate hikes are expected in the upcoming meetings and interest rates will remain high for a longer period, and most importantly, the final rate of interest rates may reach 5.1% by the end of 2023, which is a much higher level than what the Fed indicated earlier in September, and this may negatively affect gold prices.
Silver: After falling below the psychological level of $19 in late September, silver's performance in the fourth quarter of this year was outstanding, Silver increased by 26% during the fourth quarter of this year and this is considered the best quarterly gain since June 2020.Silver benefited from a lower interest rate hike in the United States in December and after the markets began anticipating the next economic recession in addition to the increase in demand due to the global increase in industrial consumption of the metal, which has many industrial uses.
Silver is trading in the short-medium term within an upward trend (Figure 2), and the levels near 24.1 are considered important resistance levels, and we will monitor its ability to overcome it.
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Figure 2: Metatrader5, XAG/USD, CFI Brokerage
In the long term (Figure 3), silver is still attempting to breach the significant resistance area at $24.7 per ounce, and if it does so, it will have been liberated from the horizontal movement that extended since January 2021, and we can expect a positive performance for silver movements. If the global economy enters a recession in 2023, as many economists predict, silver may suffer, because a slowdown in industrial activity is expected to reduce demand for silver, which has many industrial applications.
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Figure 3: Metatrader5, XAG/USD, CFI Brokerage
Oil: The 2022 markets rollercoaster was misguided to define its direction since mid Q1 and its volatility engine has been burnt out, causing severe economic turbulences that required governments and central banks to undertake harsh economic and political decisions of which had direct impact on the energy markets. Reuters commodity price index delivered its best return of 27.16% in Q1 2022 reacting to the commodity market panic caused by the Russian Ukraine war followed by 15.345 in Q2 2021 when core and headline inflation gained momentum. The momentum exhaustion in the index was demonstrated since Q2 2021 when the index return decreased from 15.345 IN Q2 2021 TO 7.15% IN Q3 followed by 1.31% in Q4 (Fig.1).
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OPEC has cut its Oil demand outlook. Fourth-quarter outlook was down by 1 million b/d in past 2 months and supply curbs that started in November eliminated surplus. Due to a weaker economic backdrop and China’s strict anti-Covid measures, the Organization of Petroleum Exporting Countries lowered estimates for crude it will need to pump this quarter by 520,000 barrels a day, following the same downgrade a month ago. Data extracted from the International energy association states that world oil demand is set to contract by 110 kb/d y-o-y in 4Q22, reaching 100.8 mb/d,. Oil demand growth has been increased to 2.3 mb/d (+140 kb/d) for 2022 and to 1.7 mb/d next year versus 2.2mb/d by OPEC. On the supply side, 2023 global supply forecast was down by OPEC to 1.5 mb/d.
Both WTI and Brent have been in a trading range on the monthly view since September 2022 pivoting around their 20 exponential moving averages. WTI and Brent support levels are $70.10, and $75.16 and resistance levels are at $93.7 and $99.5 respectively. WTI is currently trading around 38% retracement while Brent is trading below it, both are pushing to maintain the current levels after testing the 50 months exponential moving average. Trading below the 20 months exponential moving average would increase the bias for additional declines given the current global economic and political status is intact.
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Natural Gas: High prices were already sensed since the second half of 2021 which was intensified by Russian invasion of Ukraine, this led to fuel switching and demand destruction. Russian natural gas supply to the EU has been disrupted by political decisions of which both Russia and the NATO declared including Putin’s decision to receive gas payments from the EU in Russian Rubel, Gazprom technical issues, gas leakages in Nord stream gas pipe and lately the NATO price cap sanctions on Russian gas( Fig.7). European officials flagged the importance of reducing average consumption by at least 15%. Businesses in Europe coped with the reduction which has been offset by household consumption increase.
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US natural gas monthly chart (Fig 9) revels a downtrend at which it is trading below the 20 months exponential moving average and below 50% retracement level. December bearish candle (at which natural gas currently is giving away approx. 24% ) and the negative divergence on the Relative Strength Index indicator that was eminent since September 2021 gives weight to additional decline to $4 – approx. 10%.
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Aside from Russian oil price cap and global growth rate slowdown, the prolonged covid 19 restrictions in China are highly impacting oil demand since covid cases are on the rise. Although the Chinese government eased up the restrictions, still an economic activity paralysis is underway as the Chinese economy is not operating in full capacity. Finally, central bank aggressive tightening policies to curb headline inflation of which energy prices are contributing 40% to the index is a key factor pushing prices down with the support of an economic slowdown that can be sensed through global purchasing mangers’ indices throughout the developed and Emerging markets.
The upside scenario for Oil would be revealed by the Chinese economy’s reopening and OPEC+ lower production cut, to offset weak demand in addition to filling strategic inventories. Given the above, breaking the 20-exponential moving average of the quarterly time frame could pressure oil to test $65-$55 levels with an upside potential near $90-$100 throughout the Q4 2023 – Q1 2024 given economic growth rates are gaining momentum, the FED is pivoting interest rate hike reflecting on an acceptable inflation rate.
The future of natural gas will depend on winter weather conditions in Europe and governments’ ability to decrease demand, It is expected that the EU would face low inventory levels. The US natural gas quarterly view is biased to additional price decline near $4.5 since inventories are already full, however an upside swing would drive prices to $5.7 and $6.5 by the 2nd half of 2022 assuming the Russian-Ukrainian conflict would extend to end of 2023 accompanied by low natural gas investments.
The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice. Any view expressed does not constitute a personal recommendation or solicitation to buy or sell. The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI. Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.