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Clash between markets and Fed increases risks in 2023

Thursday, December 29, 2022

Significance

Fed projections suggest that interest rates will rise by 75 basis points (bp) to 5.00-5.25% by end-2023. Bond markets expect rate cuts from mid-year, in effect betting on a sharp decline in inflation and soft economic landing. If their optimism is misplaced, a major sell-off could occur.

Impacts

  • China ending its zero-COVID-19 policy abruptly is fuelling fear of more supply chain disruption, which could exacerbate price pressures.
  • The BoJ policy tweak may herald very gradual policy normalisation, but the yen will remain under downward pressure.
  • Estimates of corporate profits for 2023 could be markedly downgraded if fourth-quarter 2022 results disappoint; this could spook markets.

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