Inflation has been the major issue in Q3 2022. There are glimmers of hope in the Ukraine war, but energy and food price aftershocks will continue to strain fragile supply chains, not helped by China enforcing continued COVID lockdowns. The IMF now project inflation of over 7% in major economies this year and above 4% in 2023, and global growth is expected to be around 2.5%.
With some monthly G7 inflation prints hovering close to double digits, Central Banks have responded with aggressive short rate hikes. The most optimistic projections show US rates peaking at 4%- 5% in early 2023; but so far this year, 10-year Treasury bond yields have already moved from 1.5% to over 4%. War and rate increases have cut support for global equities, with the FTSE All-World Local 23% lower YTD, and High Yield spreads for Dollar debt have spiked from around 3% to more than 5%.
Governments and Central Banks are increasingly turning to intervention, support, bailouts and even nationalisation. So, in addition to inflation, higher yield curve levels also reflect rising global public debt. Rising long rates have uncovered some major issues in pension fund liability hedging in the UK, while energy price volatility has revealed some major derivative-driven strains in the European energy sector.
Tighter credit supply has hit private and illiquid and asset values, with IPOs drying up, house prices under pressure, and various specialised financial vehicles struggling to find investors. All of this points to higher credit defaults in 2023.
Believe it or not, there are some bright spots. Russian aggression has pushed major economies to focus on secure alternative energy sources. Airlines continue to flourish, build-to-rent is booming, and weak currencies in Japan and the UK are attracting Dollar investors. This report elaborates on some of these trends and shows where credit could be headed next.