Top 10 global macro events in 2023: the United States and Europe "beat inflation", Japan may get rid of "lost 30 years", and gold hit a record high

With major central banks such as the United States, Europe, the United Kingdom, and Japan ending their last interest rate meetings of the year, the magnificent global capital market drama in 2023 has also come to an end. In this year, too many macro events have happened that can rewrite history.

At the beginning of this year, the global financial market is still facing the challenge of high inflation, after a year of ups and downs, investors are now focusing on when the Federal Reserve will turn to cut interest rates, on the other hand, Japan, which has been in a deflationary environment for a long time, seems to be gradually coming out of the "lost three decades", inflation has been above 2% for a long time, and the market will turn its attention to when the Bank of Japan will say goodbye to the era of negative interest rates next year.

Under the Fed's aggressive interest rate hikes, the floating loss of banks' bond holdings made Silicon Valley Bank "collapse at the speed of light" this year, which has become a major event that makes investors still "feel uneasy", and Silicon Valley Bank, which ranks 16th in the United States, first experienced a stock price crash in just 48 hours, and soon declared bankruptcy and was taken over.

For Europe, price pressures in almost all categories have eased and inflation is a big step closer to the 2% target. This has led to rising hopes that the ECB will cut interest rates early, but the lack of endogenous momentum in the eurozone economy and the lack of growth is becoming more and more prominent. If not handled properly, the eurozone is likely to fall into a "stagflation" dilemma of high inflation and recession in 2024.

At the same time, the geopolitical conflict has not subsided, the Palestinian-Israeli conflict has spilled over into the Red Sea, and a total of 158 ships carrying about $105 billion in seaborne cargo have been forced to leave the Red Sea, cargo prices are soaring, and global supply chains are once again under threat. As risk aversion continues to rise, gold has hit new highs this year, and commodity attributes may have become another important force in gold pricing.

Realize that the past is not admonished, and those who know the future can be traced. On the occasion of the arrival of the new year, Wall Street has carefully selected the most influential macro events in 2023 for you, and wishes investors and friends a wealth and a long return in the new year.

The Fed suddenly "turned dovish"

Fed Chairman Jerome Powell made a sudden "turn" at the last interest rate meeting, and the market's long-awaited signal of interest rate cut finally appeared, and the last Fed decision of the year was "dovish".

At the Fed's December meeting, the target range for the federal funds rate remained at 5.25%-5.5%, while Powell's tone softened significantly, saying that "the issue of interest rate cuts has begun." Even if the U.S. economy does not fall into a recession in 2024, the Fed is willing to cut interest rates.

At present, the market has made a big bet that the probability of the Fed will cut interest rates by 25bp in March next year has reached 78%, and the probability of betting on an annual rate cut of more than 100bp has reached more than 85%.

Even the most fanatical U.S. stock and U.S. bond bulls were caught off guard by the Fed's sudden "pivot" and first talk of "cutting interest rates". The Dow and Nasdaq surged to all-time highs, while U.S. Treasuries soared and global risk assets soared.

The dramatic move upended countless people's perceptions, with JPMorgan Asset Management's Philip Camporeale increasing his equity allocation to its equity-bond portfolio to its highest level in nearly two years. Legal & General, which manages $1.4 trillion in assets, is unwinding its long-term bet on inflation-protected bonds and reconsidering underweight equities.

Some analysts have pointed out that when the market bets on interest rate cuts in the past two years, the Fed has not acted as expected, and in the coming months, if there is a CPI or employment surprise, it may prompt traders to change course. Therefore, the future trend of U.S. stocks may rise rapidly, and then fall rapidly.

Nomura warned that the macroeconomic impact of Powell's behavior is huge, and the sudden easing of financial conditions could trigger a new round of inflation.

Japan's economy is recovering, and the era of negative interest rates is coming to an end?

After the bursting of the economic bubble in the 90s of the last century, Japan fell into the "lost 30 years", the economic growth rate was sluggish for a long time, and the fiscal and monetary stimulus continued, but the effect was not satisfactory.

Since April this year, Warren Buffett has expressed his bet on Japan, a number of semiconductor leaders have invested on a large scale in Japan, and foreign capital has flowed into the Japanese stock market, and the overall net profit of Japanese listed companies has increased by 30% from April to September, refreshing the best performance in history.

The Nikkei 225 index rose significantly back to 30,000 points, Japan's inflation accelerated to pick up, more than a year at more than 2%, driving housing prices to rise sharply, Tokyo apartment prices rose by 50% year-on-year in the past year, investors began to pay attention to the possibility of the Japanese economy out of the downturn.

The Bank of Japan's last interest rate meeting of 2023 kept the ultra-loose policy of YCC and negative interest rates unchanged as expected, and did not change the dovish guidance, but the market has already bet that the Bank of Japan will "exit negative interest rates" next year.

Japan's banking sector is also quietly shifting: major banks including Mitsubishi UFJ, Sumitomo Mitsui and Mizuho have all raised their 10-year fixed deposit rates from 0.002% to 0.2% in recent weeks. While interest rates are still low, they already show that the direction of Japan's financial sector is reversing – Sumitomo Mitsui hasn't adjusted deposit rates for 12 years.

However, headwinds persist in the Japanese economy, with GDP growth reaching 2.7% in the first quarter of this year and 4.8% in the second quarter. However, just as investors cheered that Japan was coming out of the "lost 30 years", Japan's GDP fell by 2.1% in the third quarter, like a "slap in the face", and the Cabinet Office subsequently lowered its GDP growth forecast, warning that the economy would shrink again in the fourth quarter.

Nomura noted that Japan's economy still faces headwinds in 2024 as inbound demand falls, exports slow, and high inflation continues to weigh on demand, but this will not prevent the Bank of Japan from exiting easing and is expected to act in the second half of next year.

The European Central Bank is hawkish throughout the year, and the eurozone (Germany) is in recession?

Since the end of the eight-year era of negative interest rates in July last year, the ECB has raised interest rates 10 times in a row, accumulating a total of 450 basis points, the fastest pace of tightening on record.

The effects of the ECB's interest rate hikes are already starting to be felt, with inflation in the eurozone falling markedly, rising 2.4% year-on-year in November to its lowest level in more than two years. The economic data showed further signs of weakness, and from the economic data, the final value of the Markit composite PMI in the euro area in November was 47.6, better than the market expectation of 47.1, and it is still below the boom and bust line of 50.

As the locomotive of the European economy, the German economy began to "turn off", and GDP fell by 0.1% year-on-year in the third quarter, returning to negative territory. There is a view that Germany could be the second-worst performer among the 30 advanced economies this year.

Germany is the only advanced economy that the IMF expects to shrink this year. High interest rates in Germany are severely impacting demand for industrial goods, which Germany relies on to fuel economic growth more than other countries. Chemical giant LANXESS announced that it would cut 7% of its workforce this month, while Volkswagen said it would double down on its savings to improve profitability.

Germany's economic weakness combined with a slowdown in inflation in the eurozone has led to increased bets that the ECB will be the first to cut interest rates. Markets are now pricing in a nearly 90% chance that the ECB will start an easing cycle in the first quarter of next year.

The U.S. government debt crisis is back

Unlike the weak German economy, the US economy has been unexpectedly strong this year, supported by consumption.

The U.S. fiscal expansion has become an important reason for the U.S. economy to avoid a recession in 2023, and the rise in the fiscal deficit has also led to an increase in the scale of bond issuance. In fiscal year 2023, the U.S. fiscal deficit will be $1.7 trillion, up 23.2% year-on-year, and the deficit ratio will rise to 6.4%, up 0.9%.

Especially after the adjustment of the U.S. debt ceiling and the new budget bill in early June this year, the scale of the U.S. debt ushered in an epic explosion, which exceeded $32 trillion in eight months, and then refreshed a "new high" of $33 trillion in only three months, resulting in a sharp rise in the term premium in the U.S. bond interest rate.

The debt problem is a typical "gray rhinoceros", and in the short term, the likelihood of a fiscal crisis and sovereign debt default in the United States is low, but in the long run, the expansion of deficits and debt will eventually reach a tipping point.

Judging by the market performance, it seems that this possible crisis is also starting to be priced in. Since the second half of this year, long-end U.S. Treasury yields have risen rapidly, and in October, the 10-year U.S. Treasury rate rose again last week and briefly exceeded 5.0% intraday, rising more than 170bp since the low of 3.3% this year.

The continued growth of the U.S. fiscal deficit leads to an increase in the credit risk of long-term debt, which in turn increases the term premium of the debt, which may trigger a cycle of high interest rates, high-interest rate spending, high deficits, and high term premiums.

Gold prices hit record highs

Since October this year, the price of gold has risen sharply, once hit a record high of 2152 US dollars / ounce on December 1, while the gold price has risen sharply, the negative linear relationship between the "London gold price - US real interest rate" is being distorted to a large extent, since the financial crisis, the gold price closely follows the US real interest rate, the lower the real interest rate, the higher the gold price;

On the one hand, the 10-year yield on U.S. Treasury bonds once reached a level of more than 5%, a new high since 2007, and the 10-year real interest rate in the United States was also close to 2.5% at one point, a new high since 2008. According to the linear relationship between the London gold price and the US real interest rate in the past, the gold price should generally fall to around $1,000 / ounce or even below, but the gold price has performed very strong and basically remained above $1,800 / ounce, and even hit a new high since December.

Zhang Yu of Huachuang Securities pointed out that gold has the triple attributes of commodities, non-interest-bearing assets and currency, corresponding to the triple pricing of inflation, interest rate and fiat currency credit→ decoupled real interest rate = linked to fiat currency credit, reflecting the weakening of gold's commodity and non-interest-bearing asset attributes and strengthening of monetary attributes.

Zhang Yu believes that although the price of gold has reached a new high, as long as the order, economy, politics, and military changes continue to ferment, gold may have a new logic, and the amplitude depends on the strength of the resonance; gold is still an asset that needs to be paid attention to in the next 10-20 years, and it is not excluded that there will be 1-2 years of trading fluctuations, but the four major changes have not yet reached the inflection point, and the trend of the strategic level is bullish.

CICC Dotting pointed out in the report that the "derailment of gold" means that the commodity attributes of gold are improving to a certain extent, that is, the physical supply and demand of gold may have become another important force in gold pricing:

The two-wheel drive of consumption + investment demand has opened up a new space for physical demand for gold. The trend of the central bank systematically increasing its holdings of gold reserves is in the ascendant, and there is a lot of room for potential increases.

The Palestinian-Israeli conflict spills over to the Red Sea, and the global supply chain is full of crises

Attacks on ships in the Red Sea, the Bab el-Mandeb Strait and nearby waters have been frequent, and a total of 158 ships carrying about $105 billion in seaborne cargo have been forced to leave the Red Sea, and cargo prices are soaring.

Since December 15, four of the world's five largest container shipping companies, namely Mediterranean Shipping (MSC), Maersk, CMA CGM and Hapag-Lloyd, have announced the suspension of Red Sea voyages, and some shipping companies have notified them to stop cargo handling and book new cabins because the Palestinian-Israeli conflict has spilled over into the Red Sea.

Several shipping lines have announced that they will avoid the Red Sea and detour from the Cape of Good Hope in southern Africa, which has also significantly increased the distance of shipping – an additional 3,400 nautical miles (about 14 days).

SDIC Anxin Futures believes that at present, if all the routes from Asia to the Far East and the Mediterranean are detoured, it will bring about 30% and 80% of the capacity gap to the European line and the ground line respectively, and will bring additional fuel costs to the ground line. The bypass is expected to significantly boost market sentiment in the short term, and futures prices are expected to gain a significant upward momentum due to the upward support of spot spot freight rates. In the future, it is necessary to continue to observe the specific adjustment measures of each airline to the route.

According to media reports, the cost of insurance jumped to 0.5% this week from about 0.1% to 0.2% of the hull value for merchant ships still choosing to sail in the Red Sea. A $100 million ship must pay about $500,000 in premiums per voyage.

Zheshang Securities pointed out that the Bab el-Mandeb Strait-Red Sea-Suez Canal, as a transportation fortress connecting Asia, Africa and Europe, is one of the busiest shipping routes in the world, and the traffic status of this route is crucial to the international supply chain.

The main contract of container transportation index (European line) futures has hit the daily limit for three consecutive trading days, and hit the daily limit again in early trading on December 22, reporting 1236.8 points, up nearly 40% for four consecutive trading days.

Angola "withdraws from the circle", and OPEC may be in vain

Previously, Angola refused to accept the production quota cut at the OPEC+ meeting in June, which led to the postponement of the OPEC+ meeting in November, causing WTI crude oil and Brent crude oil to fall by more than 4% at that time.

In the end, African oil producers, including Angola, failed to raise their production targets as expected, and OPEC still wanted Angola to maintain its oil production quota at 1.11 million barrels per day, but Angola said it would increase production to 1.18 million barrels from January.

Angola's governor to OPEC, Estevao Pedro, said that Angola is not satisfied with the 2024 production target and does not intend to stick to it.

"If we are forced to cut production, it will be contrary to our objectives," said Angola's oil minister. While so far our production has not been directly affected in any way, this could happen sooner or later if we remain within OPEC. The time has come to leave OPEC, and our role in OPEC is no longer relevant. ”

Affected by the news of Angola's withdrawal, international oil prices continued to fall, with WTI crude oil and cloth oil both falling 2% during the day.

It is precisely because of the continuous production cuts that Saudi Arabia has not only failed to effectively boost oil prices, but also lost its market share in the crude oil market, which can be described as "thankless".

And within OPEC+, the debate over whether oil prices are more important or share is also intensifying, with large countries having big countries and small countries having small calculations.

Wall Street analysis pointed out that for oil-producing countries, they are naturally reluctant to see oil prices fall, but African member countries, including Nigeria and Angola, because their oil production is far inferior to Saudi Arabia, has less influence in the crude oil market, and is more of a price follower, so it is difficult to say how much motivation there is to maintain high oil prices by reducing production, and its production discipline is difficult to restrict.

While Saudi Arabia continues to lead the way in supporting oil prices, it is clear that other members of OPEC have their own agendas. The continued decline in oil prices suggests that OPEC+ has not improved the market's perception of its cohesion and efficiency, and that OPEC+ may have to provide a strong surprise to calm the market, analysts said.

The internal rift is getting bigger and bigger, how long can Saudi Arabia be able to hold on?

The collapse of Silicon Valley Bank, the banking crisis in 2023

In 2023, the bankruptcy of Silicon Valley Bank became a landmark event in the global banking industry.

In March this year, Silicon Valley Bank, ranked 16th in the United States, experienced a stock price crash in just 48 hours, and soon declared bankruptcy and was taken into receivership. The fuse of the bankruptcy was the liquidity crisis and panic, while the deeper cause was the floating loss of banks' bond holdings due to the Fed's aggressive interest rate hikes, and the rapid depletion of cash deposits by tech startups (SVB's main depositors) during the hiking cycle.

As a result, the U.S. financial market fluctuated violently, and many financial institutions and enterprises fell into chaos. The market was worried about whether Silicon Valley Bank would become the second Lehman Brothers, which would further trigger systemic financial risks in the United States and even impact the global financial system.

Behind the turmoil in the U.S. banking industry is the asset mismatch of Silicon Valley Bank after the Federal Reserve's successive sharp interest rate hikes: the asset side has allocated a large number of U.S. bonds and residential mortgage-backed bonds (MBS), and under the impact of the Fed's sharp interest rate hikes, U.S. bond interest rates have risen rapidly, resulting in a sharp decline in the value of U.S. bond assets held by Silicon Valley Bank. In addition, when the risk-free rate rises, the price of MBS falls rapidly, and at the same time, residents are not inclined to repay early, which will further extend the duration of MBS.

After the outbreak of the banking crisis in the United States, the rescue measures taken by the Federal Reserve and the US federal government have also been questioned. With the approval of the Treasury Department, the Fed established a temporary lending facility, the Bank Term Financing Program, to allow banks to access additional liquidity to meet any unexpected withdrawal needs.

At the same time, in this bailout of banks such as Silicon Valley Bank, US regulators cited the "systemic risk exception" to justify depositors in full, rather than relying on a deposit insurance system of $250,000 per account.

The analysis points out that due to the extremely fast speed and wide scope of risk spillover, the United States has established a rapid and clear systemic risk decision-making process while strictly limiting the conditions for the use of the "systemic risk exception" clause, so as to effectively improve the efficiency of risk response. After the risk spillover from the collapse of Silicon Valley, the U.S. crisis management mechanism responded quickly, and the Federal Reserve and the FDIC judged that the "systemic risk exception" clause was activated immediately after the Treasury Secretary reported to the president for decision-making, and the entire decision-making process from identification to determination to activation lasted less than 48 hours, quickly stabilizing market sentiment and preventing risk spillover.

The central government decided to issue an additional trillion yuan of treasury bonds

In order to support post-disaster recovery and reconstruction and improve disaster prevention, mitigation and relief capabilities, the central government decided to issue an additional 1 trillion yuan of treasury bonds, which began to be released in December as relevant projects were finalized.

Recently, the National Development and Reform Commission has issued a list of the first batch of projects for the issuance of additional treasury bonds in 2023, with nearly 2,900 projects, according to the projects and the amount of treasury bonds determined by the implementation mechanism of the additional treasury bond issuance project. Accordingly, the Ministry of Finance has recently issued the first batch of capital budgets of 237.9 billion yuan.

According to the previous deployment, of the additional 1 trillion yuan of treasury bond funds issued in the fourth quarter of this year, 500 billion yuan will be used this year and 500 billion yuan will be carried forward to 2024. This means that 262.1 billion yuan of treasury bond funds may be released before the end of this year.

The issuance of additional treasury bonds at the current point in time has a positive impact in many aspects. On the one hand, there is a need and space for the central government to increase leverage, which will effectively stimulate infrastructure investment and release a strong signal of stable growth.

Ming Ming, chief economist of CITIC Securities, said, "The current demand for stable growth drives the fiscal policy to remain positive, but in the case of insufficient local financial resources and limited local debt expansion, fiscal force needs to rely more on the central finance, that is, through the central government departments to increase leverage, to make up for the limited space for residents and enterprises to increase leverage." ”

On the other hand, it will also help to assist local debt. According to the statistics of Guojin Securities, as of October 20, 22 places have issued or disclosed special refinancing bond issuance plans, with a total scale of 943.8 billion yuan.

Munger died

Berkshire Hathaway announced that on the morning of November 28, local time, Charlie Munger passed away peacefully in a California hospital at the age of 99. Warren Buffett, CEO of Berkshire, said in a statement: "Without Charlie's inspiration, wisdom and involvement, Berkshire would not have been where it is today. ”

In 1978, Munger assumed the role of Berkshire's vice chairman. In the 45 years since, Berkshire's market value has skyrocketed from $10 million to nearly $750 billion (about more than 5 trillion yuan), an increase of more than 75,000 times.

Munger was born on January 1, 1924, at the age of 99. It's a shame that he didn't celebrate his 100th birthday. Munger has been called "the walking encyclopedia", "the brains behind the scenes", and "the last secret weapon".

Among the partners in the global investment circle, Munger and Buffett can be described as a fairy-level combination, an absolute golden partner, known for more than 60 years, Munger is 7 years older than Buffett, both grew up in Omaha, Nebraska, which is also the headquarters of Berkshire.

Munger has lived in Los Angeles for many years. He is often on the phone with Warren Buffett, who lives in Omaha, in Los Angeles. Even if they can't be contacted, Buffett says he knows what Munger will think.

For many years, Munger was more of a counselor and adviser to Buffett and was not directly involved in the day-to-day affairs of the company.

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