César Pérez Ruiz, Chief Investment Officer Pictet Wealth Management
The award of the Nobel prize for economics to former Fed chair Ben Bernanke was a reminder, if one was needed, of the critical role of central banks in maintaining financial stability. This was amply evidenced by the Bank of England’s part in the reversal of ‘Trussonomics’— in other words, the abandonment by the new UK prime minister Liz Truss of her tax-cutting plans (and of her Chancellor of the Exchequer in the process). The events in the UK will be noted by governments elsewhere on the look-out for new sources of revenues just as central banks are making the cost of issuing debt more expensive. Yet governments are also having to contend with growing public unrest at the steep rise in the cost of living, as shown by strikes and threatened strikes in France.
The stubbornly high consumer inflation print for September is forcing the Fed to stay aggressive, increasing the probability of a recession. Even though Fed vice chairperson Lael Brainard showed signs of flexibility in a speech last week, a policy pivot now seems further off, as a downturn in goods inflation was not enough to compensate for a rise in services inflation. A 75bp hike at the next Fed meeting at the start of November now seems certain, especially as Fed Governor Christopher Waller downplayed the liquidity risks stemming from tighter policy. Like Brainard, Treasury Secretary Janet Yellen struck a pragmatic note at the annual meeting of the International Monetary Fund in Washington—but the overall mood was gloomy with few solutions offered to current problems. Last week, Japanese government bonds (JGBs), whose yields are capped by the Bank of Japan, were untraded for four straight sessions. We are underweight JGBs.
As the US imposed far-reaching sanctions on semiconductor exports in an attempt to stymie China’s technological progress, president Xi Jinping stated at the start of the Communist Party Congress that China would not change course even if it faces “dangerous storms” in a more hostile world. We will monitor closely the balance of power between Xi and reformists after new appointments to the party’s politburo as this will determine China’s future path.
German chancellor Olaf Scholz has been facing criticism for devising a EUR200 bn energy subsidy for companies and households, seen as offering Germany an unfair advantage over the rest of Europe. We believe Europe should work to develop a common solution based on joint euro debt issuance, with the proceeds distributed as loans to all countries. The Q3 reporting season has started with banks surprising on the upside thanks to net interest income. We will continue to watch guidance into next year. We are still underweight equities.
