The Fed’s tightening cycle is coming to an end
Concerns about the debt ceiling impasse are rising
Mega-cap earnings will be key to watch
Pro football’s long-awaited draft is here! This year’s 88th annual draft takes place in Kansas City (home of the reigning champs), where the 32 franchise teams get a chance to fortify their rosters. To level the playing field and ensure that all franchises have a competitive edge, the league grants the team with the worst record in last year’s regular season the top pick among the most elite college football athletes across the nation. The reigning championship team is awarded the final selection of each of the seven rounds of the draft. To add to the excitement, teams trade their draft picks to rebuild their rosters or put their franchise in a better position to acquire specific skill sets that need to be filled. In the spirit of the draft, we present our own top five picks for 2023 and their potential to move markets:
Jerome Powell | With the first pick of the draft, we select Federal Reserve Chairman Jerome Powell, who has an unparalleled sphere of influence on financial markets worldwide. When Powell speaks, the world listens. His words and actions have the power to move markets significantly – in either direction. And with the Fed expected to deliver another 25 basis point rate hike at the May 2-3 meeting next week, Powell’s press conference has the potential to be a pivotal event for the market. We expect him to insinuate that the Fed will potentially pause after this rate hike to assess the lagged economic impact of the aggressive tightening to date and to monitor credit conditions in the wake of the recent banking sector stress. Despite market expectations for rate cuts on the horizon, we do not expect the Fed to cut rates in 2023, especially with inflation still above its 2.0% target.
Kevin McCarthy | With the debt ceiling standoff looming on the horizon, Speaker of the House McCarthy will certainly not be this year’s ‘Mr. Irrelevant’ – the league’s nickname for the last pick in the draft. He has vaulted onto our radar within the last 100 days as his rise in stature makes him a key player in the upcoming debt ceiling negotiations. His ability to unite the fractured House Republicans to pass legislation to suspend the debt ceiling for a year or raise it by $1.5T (whichever comes first) in exchange for ~$4.5T in spending cuts is notable, even if the bill has no chance of passing in the Democratic Senate. With no resolution in sight and the ‘x’ date rapidly approaching, President Biden will need to engage in negotiations with McCarthy. While brinkmanship will make markets jittery, with 1-year CDS spreads widening to 167 bps, a last-minute resolution is still the most likely scenario.
Mega-cap Tech-related companies | Mega-cap earnings reports were the star players this week with Alphabet, Amazon, Meta and Microsoft reporting better than expected earnings. This is encouraging news considering how much their stock prices surged last quarter after the companies reported cost-cutting/efficiency initiatives. The top-heavy nature of the S&P 500 Index makes the results of these mega-cap companies particularly important for the overall direction of the market. Apple, the largest company in the US and a bellwether of global economic conditions, reports next week. The resiliency of tech-related earnings helps buoy our expectations that 2023 earnings for the S&P 500 will be $215, far from the bearish naysayers looking for earnings below $200.
Xi Jinping | With COVID restrictions now lifted, President Xi has been busy flexing China’s diplomatic muscles on the world stage, trying to position China as peacemaker and present an alternative to the current US-led global leadership. While much of the Western world remains sceptical of Xi’s motives, he notched a win by brokering a Saudi-Iran reconciliation deal even if attempts to negotiate a truce between Russia and Ukraine have fallen flat thus far. Xi’s long-standing ambitions to dent the dollar’s dominance in world trade has garnered significant media coverage recently, causing investors to get nervous about the value of the U.S. dollar. Regardless of Xi’s rhetoric, China is not about to supplant the U.S. dollar as the world’s reserve currency any time soon. Until China scraps its foreign exchange controls and allows it to be freely convertible, the renminbi will not be seen as a store of value and its share of global reserves will remain limited.
Vladimir Putin | Putin’s unprovoked war with Ukraine has had a profound impact on the global economy. Over the last year, the war has contributed to the highest inflation in four decades, increased food and energy insecurity, led to supply shortages, and ended the global peace dividend. Far-reaching sanctions against Russia have failed to get Putin to change course and an endgame to the conflict remains elusive. That leaves the global economy, at least the parts that rely on vital Russian supplies, at the whim of a menacing actor. Russia’s threats to end the UN-Turkey brokered grain deal that expires on May 18 could have a devastating impact on food security in impoverished nations and could drive global food prices higher again, which would not be good news for inflation. The Black Sea grain deal has been a key factor in driving global food prices lower over the last year.
All expressions of opinion reflect the judgement of the author(s) and the Investment Strategy Committee, and are subject to change. This information should not be construed as a recommendation. The foregoing content is subject to change at any time without notice. Content provided herein is for informational purposes only. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices and peer groups are not available for direct investment. Any investor who attempts to mimic the performance of an index or peer group would incur fees and expenses that would reduce returns. No investment strategy can guarantee success. Economic and market conditions are subject to change. Investing involves risks including the possible loss of capital.
The information has been obtained from sources considered to be reliable, but we do not g