The global economy started 2023 on an unexpectedly positive note. The US economy was on a strong footing, supported by a robust labour market and a reduced drag from high energy prices that peaked in mid-2022. Euro area growth held up better than anticipated over the winter, partly due to unseasonably warmer weather, while the Japanese economy benefited from improving consumption after the easing of COVID-related restrictions. In China, economic activity rebounded swiftly after the December 2022 relaxation of its extreme COVID lockdown policy. While Developed Market headline inflation continued to moderate as price shocks from Russia’s aggression in Ukraine began to fall out of the calculation, resilient labour markets and still-elevated services sector inflation kept major central banks on a tightening path. Toward the end of the first quarter of 2023, however, the failure of several US regional banks resulted in a substantial market reassessment of the future path of central bank policy. The US Federal Reserve has the unenviable task of trying to engineer a further decline in inflation, still far above its 2% target, while simultaneously maintaining depositor confidence in a suddenly-shaken banking system.
After another round of hikes in late spring, many global central banks are expected to go on hold through the summer. Market pricing suggests that they will cut rates as soon as late 2023 and into 2024, but official communications so far suggests otherwise. Nevertheless, the impact is seen on movements in sovereign bond yields with short-term rates increasing and longer-term rates easing over the quarter. The inverted yield curve, across many different measures, suggests increased risks of a recession going forward. In spite of these risks, global equities performed well in Q1, though valuations also became more expensive. Non-US stocks remain cheaper than US stocks. Our US economic growth forecast for the next 10 years is slightly higher than last quarter, while non-US developed growth forecasts are mixed and Emerging Markets forecasts are lower.
Our inflation forecasts for the same horizon are higher for Japan, lower for Emerging Markets, and mixed elsewhere. Evolving policy rates and forecast economic growth and inflation have important implications for our long-term asset class forecasts.
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The views expressed herein are those of PGIM investment professionals at the time the comments were made, may not be reflective of their current opinions, and are subject to change without notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute investment advice or an offer to sell or a solicitation to buy any securities mentioned herein. Neither PFI, its affiliates, nor their licensed sales professionals render tax or legal advice. Clients should consult with their attorney, accountant, and/or tax professional for advice concerning their particular situation. Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. The manager has no obligation to update any or all such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy.
Any projections or forecasts presented herein are subject to change without notice. Actual data will vary and may not be reflected here. Projections and forecasts are subject to high levels of uncertainty. Accordingly, any projections or forecasts should be viewed as merely representative of a broad range of possible outcomes. Projections or forecasts are estimated based on assumptions, subject to significant revision, and may change materially as economic and market conditions change.
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