Weekly Update - 2023: bonds to reinforce attractiveness during first half
The beginning of the year is a good time to look ahead. Although the first few days seem to show some moderation in interest rates, thanks to a slowdown in inflation in the euro area, we expect the first part of the year to remain both uncertain and marked by high interest rates. This will be particularly favourable for bonds and defensive stocks.
Less growth and gradually less inflation
Our economic scenario for 2023 sees economic activity for developed economies continuing to slow. While some countries may slip into recessions, these should be fairly modest. Support factors such as buoyant labour markets, Covid savings and fiscal measures to counter the energy crisis in Europe should continue to mitigate the negative factors of high inflation, rising interest rates and the European energy crisis. This slowdown should give way to a modest recovery as the year progresses, with growth nonetheless remaining below potential due to the lasting effects of the energy crisis and the need to return fiscal policies to normal. Headline inflation should fall back in 2023 due to base effects. Underlying inflation, however, will take longer to come down, as existing pressures continue to spread out through the economy. Central banks will keep raising rates until 1Q23 and then take a long pause. While markets seem to have priced in much of the tightening to come, there could be further tweaks, notably to central banks’ balance sheet policies. In any event, uncertainties are set to remain acute against a backdrop of simultaneous slowdown by leading developed economies and a rapid tightening of interest rates.
Rates to stay high, making bond yields attractive
2022 was dominated by the rapid tightening of interest rates, putting an end to years of rock-bottom yields. This automatically drove down bond values. In 2023, markets are likely to remain volatile but should benefit from high rates as long as central banks continue to worry about inflation. Real yields should therefore remain positive and hence attractive, particularly if uncertainty remains high, discouraging investors from taking big risks.
This context of positive real rates is good for defensive assets
Central banks will want to keep real interest rates in positive territory across all maturities to continue bearing down on inflation. This will favour well-rated corporate bonds and indices of value stocks.
Finally, in the main events of the week, we have chosen to talk about the communication of the ECB and the Federal Reserve following the publication of key statistics on inflation in the Eurozone and employment in the United States.