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December 4, 2023 - A "soft-landing" could be more of a dream than reality.

Whether you are on a plane or a parapente, you always dream of a soft landing. And this is exactly what the central banks, the markets and ourselves are now dreaming of (and secretly wishing to Santa) for the economy. Or in other words, the markets are now pricing (wishing) that the aggressive rise of interest rates which has already impacted inflation will only slow down the global economy to low growth (soft landing) and will not "crash" (recession). But this is for now just a dream and given the fact that what has happened in the last three years has never been tested or tried before (lockdowns, huge payments to unemployed people, negative interest rates followed by aggressive interest rate increases in such a short period of time ), we are becoming skeptical and chose to have our seat belts tightened, now that markets have recovered from their lows again.

We were wrong to have been afraid of a recession in the second half of this year in Europe and the US. We were not the only ones who feared that the 1970s style of aggressive monetary policy to combat inflation would probably sink the economies into recessions, as a collapse in consumer demand is the surest and most unpleasant way to bring inflation down significantly. And the collapse of three large US banks, not to mention the bail-out of the mighty Credit Suisse made us wory more. But recession did not materialize in 2023. We had underestimated two factors: the rather short period of time which had passed since the central banks first raised interest rates and the amount of excess savings that still existed in the consumer pockets, after the pandemic. With respect to the first factor, time is now approaching the critical level of the 12-18 month period when the big rise of interest rates is really impacting economies. And with respect to the second factor, excess savings are now almost gone and credit cards are being used up relentlessly to satisfy the need for spending on goods and services. Credit card balances are at record highs, customers pay record intest rates and delinquencies are rising.

The next six to nine months will be crucial to see whether the pilots of the central banks have mastered a perfect soft landing or we finally crashed. To give some small credit to our previous forecast, things have significantly deteriorated in the last three months in the Eurozone. Germany is already in technical recession and unemployment rose to 5.9%, the highest in two years. France's final figure for Q3 GDP showed a contraction of 0.1% vs the previous quarter and this revision surprised negatively, as the initial estimates had shown a small rise in GDP growth of 0.10%. On the contrary in the US, GDP growth is still robust, helped by the increased capex in AI-related technologies as well as the still strong services sectors (hotel, leisure, travel etc.). But even there, we are increasingly receiving data that unemployment is rising and tight financial conditions are having a toll on consumer spending. The continuing jobless claims climbed to 1.97mn, last week, the highest number since November of 2021, when we were still in "pandemic-mode".

And Germany's GDP growth prospects are even gloomier after the recent decision of the Constitutional Court. Without getting into details that would confuse rather than enlighten our readers, we must say that the level of debt and spending of the German government is constitutionally fixed so that no government can mess around with the country's finances. Of course there are clauses that give the government flexibility in extreme times of natural disasters or pandemics to stretch the budget. The German government saw the unused funds that were raised for the pandemic-relief programs as an opportunity to finance other projects, involving Green Transition and Green Energy. But the Constitutional court found that these funds if not used for an emergency must not be used for other reasons and hence the 2024 Budget must now be re-written with about 60bn EUR less spending. This looks small, but it is estimated that the overall impact of less spending in the economy could take off 0.5% of GDP growth in 2024, at a time where GDP growth was already slightly below zero.

But the week had more negative news to offer, in terms of Eurozone's economic growth prospects. According to the latest ECB data, the Eurozone companies have made a net repayment of loans for the first time since 2015, which is hardly a sign of economic enthusiasm. In particular, loans to companies dropped 0.3%, the first negative reading since the Euro-crisis period of 2011-2015. As a comparison, at the start of the year, loan growth was running more than 6%. At the same time, the Eurozone M3 money supply shrank 1.0% in October following a 1.2% decline in September, for the fourth consecutive contraction. To put things in a simpler language, companies and consumers are borrowing less and banks are less willing to lend, with liquidity in the system moving lower. These are conditions that have a negative impact on GDP growth and a precursor of recessions.

Inflation slowed further, in Europe and the US. The November headline inflation number for the Eurozone came in at 2.4%, down from 2.9% in October and lower than the 2.7% expected. It is at the lowest level since July of 2021 and lower by 8 percentage points from the peak of 10.6% inflation, which freaked everybody out, exactly one year ago. It is now very close to the 2% target of the ECB and we have now even more reasons to believe that there is no more rate hikes. Even more importantly, Core inflation which excludes food and energy dropped to 3.6%, below 4% for the first time since June of last year. In the US, the October PCE deflator (Personal Consumption Expenditure), which is the FED's favorite gauge for inflation dropped to 3.0%, down from 3.7% in the previous month.

Interest rate cuts are coming, perhaps sooner than everyone thought. Low growth and low inflation are reasons for the central banks to cut interest rates. We have to remind our readers that the ECB hiked rates in September based on a median inflationary outlook of 3.2% in 2024 and 2.1% in 2025, and then paused during the October meeting. The ECB will now publish its updated macroeconomic projections in less than two weeks and all eyes will be focused on whether the inflation outlook is revised lower, which we assume it will. The market has been quick to bring forward the first 25bp rate cut to the April meeting, for the first time.

In the US, there has also been a small change among FED Governors, and especially the so-called hawks, who seem to have watered down their "aggressiveness". Speaking at the American Enterprise Institute, Governor Waller said "I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 percent," striking a much less hawkish tone than before. He noted that he was encouraged by recent evidence of slowing economic activity, indicating to him that policy is "currently well positioned" to return inflation to the Fed's target. Governor Bowman, perhaps the most hawkish of all, has dropped the plural ("increases") from her recent speech and sounded more willing to consider a prolonged pause. "I remain willing to support raising the federal funds rate at a future meeting should the incoming data indicate that progress on inflation has stalled or is insufficient to bring inflation down to 2 percent in a timely way," she said today. All in all, the market took these two speeches as a confirmation that no more rate increases are to be expected and than rate cuts should happen in the second half of the year.

Equities had another positive week, with Nasdaq and Technology under-performing this time. Investors decided to rotate capital out of the "magnificent-7" , some of which had risen to a new record high and place it into lagging sectors such as Financials. This led the Dow Jones to a 2.5% rally for the week, as the S&P500 rose by 0.8% and Nasdaq less than 0.4%. Small caps rose by 4%, of which the 3% gain came on Friday. Energy was the only negative sector, as oil prices were volatile ahead and after the OPEC+ meeting, which left more questions than answers.

Bonds kept rallying and the bond vigilantes, which we mentioned about two months ago, keep being crushed. We had mentioned in October that the levels of yields back then were too high to ignore, but we did not really think that the rally would be so fast and so forceful so soon. But that is the beauty of investing at something that is heavily shorted by the traders and who will have to cover their losses by buying more and more of the asset that a long-term investor has acquired at very attractive prices. The US 10-year yield dropped to a low of 4.22%, down more than 80bp from the October peak, which means a rally of more than 5% on the price of the bond. But even us, that we were very positive on bonds until one month ago, we now advise to not chase the market higher. Long-term yields might have found their bottom (and prices their peak) for 2023.

Chart of the Week : The Swiss Franc is usually strong in December.

The above image shows the monthly performance of the USDCHF (the value of the USD vs the Swiss Franc) 20 years. When a grid is green, it means that the Swiss Franc has dropped against the dollar (the USD is higher) and then the grid is red, it shows periods of Swiss currency appreciation. It is impressive that December is traditionally a very good month for the CHF, as only during six out of the last twenty years it has not moved higher. If one looks on the top row, which shows the 20-year average, it is also impressive that the average move in December is very small , but December shows the highest with an average increase in value of 1.5%. There is no real reason behind this statistic, but given the recent big move of the CHF against both the EUR and the USD, it seems that traders are preparing for a repetition of the historic trend. The CHF has appreciated almost 4% against the USD in the last 3 weeks and 2% against the EUR. Fundamentally, we believe that the CHF can appreciate further more against both currencies in the years to come and hence we like owning shares of high quality Swiss companies, regardless of the short-term fluctuations or under-performance.


• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources: Chart of the Week : UBS Photo:


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