Some cards are still to be discovered, but the game is taking shape. The New Year it started with economic data decidedly best compared to last fall's forecast. Watchlist are still the gas price when it will start again in April stock replenishment and the new behavior of the ECB on bonds from March. Expectations are of a possible regurgitation of inflation in spring with a consequent, temporary drop in stock exchanges and it will be aexcellent occasion to enter the stock market. On Italian bonds, the Treasury will aim to increase the issue of bonds for small investors, thus counterbalancing the exit of the ECB and stabilizing prices. He says it in an interview with Firstonline, Antonio Cesarano, chief global strategist of Intermonte.
Last autumn, very gloomy forecasts were made for 2023 which included a further rise in inflation, with gas prices still skyrocketing, declining company profits, recession, a very weak business market. Instead, we started the year with a completely different panorama: rising stock markets, corporate bonds as well as fixed income, falling inflation and decent economic growth. And even the most recent company balance sheet data, the first to also include the effects of war and the energy crisis, aren't bad. How do you assess the situation?
“The situation has actually changed a lot compared to the estimates made at the end of the year. Except perhaps the US technology sector, all the others are showing that they have withstood the jolts of geopolitical crises and energy crises well so far. Indeed, there are sectors, such as those linked precisely to energy on the one hand (in 2022) and banking (also in 2023) on the other that have recorded excellent performances”.
Even the latest data from PMIs are giving reassuring indications
"Exactly. It is worth dwelling in particular on the PMI services, the one which, in addition to covering the greater part of the economy, is the one in which the inflationary hotbed lurks most and where it is more persistent, compared to the manufacturing sector. Precisely in services we see that, despite prices still rising, the pace has slowed down to a 16-month low, thus illustrating a more relaxing climate on the inflationary side".
Remaining on the subject of inflation, another decisive issue for understanding what the future economic conditions will be will be the trend in the price of gas. How do you read the current situation and above all the future one?
“Currently the price of gas is just under 50 euros… who would have bet on this level just a few months ago? In addition, we are full of supplies and their use is at a relaxed pace thanks to the warmer weather. Germany still has 84% stock and Italy 75%. Until February/March the situation should remain good at these levels”.
After, what happens?
“It is not now that we see how the price of gas really behaves. We need to see what happens when we start stockpiling again from April onwards. There could be a flare-up in prices and then, as a chain, trigger a temporary slowdown in the declining pace of inflation”.
Based on how inflation moves, central banks will decide their monetary policy. How can we predict the next moves of the ECB and the Fed? What factors will they be based on?
The market is wondering what the Terminal Rate of the central banks will be, ie the final landing rate based on the dynamics of inflation. And there are areas to keep closely under observation.
Certainly on the one hand the special observed are consumption.
On the other hand, especially in the US, there is also the wage component, which is much more resistant to falling. In particular, it is necessary to observe the trend of pensions: in some European countries and in the USA the pension escalator is still in force and in a society where life is lengthening, there are many people who find themselves with more money to spend in scope of services: from travel to catering, from fitness to medical care. Those who benefit from the pension hike are led to spend more and therefore prices rise. In the USA, for example, Social Security adjusted pensions by as much as 8,7% in January.
Furthermore, the trend in the price of oil also remains highly observed in the short term. Certainly the tug of war between Biden and Putin these days could trigger other tensions on prices. So, in this context, where the economy appears to be holding up well, central banks need to closely monitor the rate at which inflation is falling.
Can you give your forecast on interest rate levels?
If inflation falls too slowly, central banks will be prompted to put further pressure on rates: but by how much? It is precisely on this that the markets are wondering: will it reach 3,75% for the ECB and 5,50% for the Fed? The game is played on this quantum. In recent days, the focus has also begun on a second dimension of the terminal rate issue: even if, for example, the Fed goes up to 5,5%, how long will it then remain stationary at this level?
How do you interpret the behavior of the markets since the beginning of the year? Do they give an indication of how they will move forward?
In January we saw bonds and equity go in unison (in terms of price) upwards. As had happened last year but in reverse, when both went down. In the first half of February, however, they distanced themselves and then returned to unite in recent days. If the pressure on policy rates continues, stock markets will eventually be hit, but central banks don't want to be too aggressive. And the markets perceive it.
Do you see the coming months as a good time to enter the stock market?
Towards the second quarter, when, as we have seen, the rebuilding of gas stocks will start, we could see a resurgence of inflation. The central banks will play the rate card and if it were a bit heavy the stock markets could fall in that period, temporarily untying themselves from the bond market. Here, that case could represent a good opportunity to enter the market and accumulate. Looking forward to arriving in the second half of the year and verifying whether there really will be a US recession or not.
Which sector sees the best position on the stock exchange?
At the moment, certainly the most favored are securities in the value sector, with banking in the lead. The central bank offers banks deposits, but certainly does not encourage them to make loans, because these would lead to an increase in consumption and therefore inflation. Instead, banks are offered money that is deposited again with the same central bank with a margin: little effort and a lot of gain.
But central banks aren't in the spotlight just for rates: next month the ECB will start to change its super-loose monetary policy, reducing the amount of bonds purchased during the most difficult periods. How will this new situation impact the bond market? Could there be an impact on prices?
Yes, it is true, the ECB will start moving on the market, but it is a very special game. Let's take into account that the Fed holds Treasuries bonds for about 5.000 billion dollars and about the same amount of bonds is in the coffers of Frankfurt. If these assets were in the hands of investors, in a time of rising rates to fight inflation, they would not hesitate to sell as much as possible, causing prices to collapse. Instead, central banks are now the largest bond holders in the world. There are also funds, but they have much more limited amounts in their portfolios. We are in a game in which the central banks themselves come into play: “if I raise rates, I continue to hold the bonds without selling them, thus stabilizing the price. If anything, I reduce the amount reinvested every month” is their reasoning. This explains why with almost 2-digit inflation, bond yields rise in a relatively more contained way: if there weren't the effect of QE, rates would probably jump much higher.
On bonds, what are the most appropriate maturities for an investor?
We have long had an inverted curve with short rates higher than long rates, as if the market were expecting an imminent recession. The preferential habitat for investing is the maturity around 5 years. After all, we also saw it with the response of investors on the occasion of the BTP Italia issue in November, which saw a demand for almost 12 billion, or even the ENI Bond aimed at retail in January with a request for over 10 billion.
Compared to the changes in the ECB's monetary policy on the purchase of bonds that we have seen, how do you think the Italian Treasury, which will have to refinance itself abundantly, will move?
The Italian Treasury intends to aim this year to increase the share of participation of retail investors in its issues. He already does it with the Btp Italia. There are press rumors about plans for issues with lower taxation precisely for retail investors. In essence, the Mef wants to progressively strengthen the ranks of Bot people, which will essentially have the same price stabilizing function that the ECB now has with the holding of bonds. So we should expect a lot of issuance of retail facing bonds with maturities around 5 years.
Speaking of refinancing by the Treasury, let's come to the most painful note of the Italian State. Despite better-than-expected data on economic growth, despite improvements in many sectors, Italy still has to carry the bandwagon of high debt. How do you see the situation? Is such a high debt sustainable with rising rates?
All in all, I see a more positive situation than in the past: high inflation in fact helps debt sustainability, because it increases nominal GDP. High debt in a situation of rising interest rates is sustainable, if the cost of debt is lower than the growth of nominal GDP: in 2022 we had an average cost of debt of 2,9% and a nominal GDP of 4/5 pct and so it is sustainable.
Of course, the deficit must not rise excessively. We are seeing decisions on bonuses for example these days: we will see what their impact will be on the deficit and GDP.
