Head of FX Strategy
Summary: As the FOMC voting rotates, the new set of voters in 2023 will likely see a dovish tilt. Hawkish members like Bullard, Mester and George will not be voting this year, being replaced by Goolsbee, Logan and Harker. Kashkari, who is currently hawkish, will also be voting in 2023. Still, broad consensus is likely to remain on Fed policy unless economic conditions deteriorate materially and labor market starts to loosen in H2.
Going into 2023, the focus for the Fed will squarely remain on inflation, despite the recent softening. A tight labour market meanwhile continues to provide room to the Fed to continue hiking rates well above 5%. However, it will be key to watch how the Fed’s voting committee changes could potentially affect policy direction.
A number of the hawkish Fed members will not be voting this year as the Fed ensues its annual voting rotation. James Bullard of the St. Louis Fed, Loretta Mester of the Cleveland Fed and Esther George of the Kansas City Fed, all of whom have favored sharply higher interest rates to help curb inflation, will lose their votes. Boston’s Susan Collins, a newcomer who’s considered to be neutral, will also lose her voting seat.
Charlie Evans of the Chicago Fed and Esther George of the Kansas City Fed are retiring in early 2023. Charlie’s successor has been named. Austan Goolsbee, who will have a voting role at his first meeting in 2023, will replace him. He is expected to be dovish. Goolsbee will be joined by newcomer Lorie Logan at the Dallas Fed, who is also a centrist. Philadelphia Fed president Patrick Harker will rotate into a voting position. Minneapolis’s Neel Kashkari, who is currently an arch hawk after being an uber dove for many years, will also be voting in 2023.
While H1 should continue to see a broad consensus within the Fed’s board with inflation remaining a key concern, disagreements may start to flow in from H2 if economic conditions deteriorate materially and labor market starts to loosen. The bar for cutting rates in 2023 will still remain high, however, as any recession in the US – if one was to occur – will be short and shallow.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
