World economic growth is forecast to decelerate to 2.4 per cent this year – marking recession in the global economy – from 3 per cent in 2022 as deepening inequalities, mounting debt and uneven post-Covid recovery take hold.

All regions, except for east and central Asia, are expected to post slower growth this year compared to 2022, with Europe registering the largest drop, the UN Conference on Trade and Development (Unctad) said on Wednesday in its report.

The projection for modest growth of 2.5 per cent next year depends on the eurozone's recovery and the avoidance of adverse shocks by other leading economies, it said in the report titled Growth, Debt, and Climate: Realigning the Global Financial Architecture.

Global economic growth is unlikely to rebound sufficiently to pre-pandemic levels, which means urgent needs such as food security, social protection and climate change are at risk of being shelved, the UN body warned.

Growing inequalities within countries are weakening global demand, holding back investment and limiting growth, it said.

"There is no clear driving force to propel the world economy on to a robust and sustainable recovery track," Unctad said.

"Without decisive action, the fragility of the global economy and an array of diverse shocks risk evolving into systemic crises. Policymakers must navigate these challenges on multiple fronts to chart a more robust and resilient trajectory for the future."

Decelerating economic growth in 2023 and 2024, which is set to fall below the average for the five-year pre-pandemic period in all regions except Latin America, is "of particular concern" given the ambitious development and climate targets set by the international community with a 2030 delivery date, Unctad said.

Global trade in goods and services is forecast to grow about 1 per cent in 2023, significantly below world economic output growth, according to the report.

This is also lower than the average growth registered during the past decade, itself the slowest average growth period for global trade since the end of the Second World War.

"A significant reshaping of world trade, including the restructuring of global supply chains, is under way. Navigating this transformation poses major challenges to most developing economies at a time when their prospects for economic growth are deteriorating, the investment climate is worsening and financial stresses are mounting," Unctad said.

Many developing countries could become caught in the crossfire of trade disputes or face growing pressure to take sides in economic conflicts they neither want nor need, the UN body warned.

The rise of protectionist unilateral trade measures can also hit developing economies’ exports and hinder their prospects for structural transformation.

Another major concern is the debt burden weighing on developing countries.

Low or lower middle-income "frontier economies" have been hit hardest, Unctad said.

External public and publicly guaranteed (PPG) debt in these economies has tripled in the past decade, straining public finances and diverting resources from critical development goals, a trend worsened by the shocks of the pandemic and climate change.

The PPG debt service surged for these countries from nearly 6 per cent to 16 per cent of government revenue in the decade following the global financial crisis.

Nearly a third of frontier economies are on the precipice of debt distress and urgent measures are needed to prevent more countries from reaching the brink of financial distress or tipping into default.

Unctad called for a reduction in inequality between countries and for major central banks to play a bigger role in creating stability in the global economy.

"We need a balanced policy mix of fiscal, monetary and supply-side measures to achieve financial sustainability, boost productive investment and create better jobs," Unctad's secretary general Rebeca Grynspan said.

"Regulation needs to address the deepening asymmetries of the international trading and financial system."

Unctad urged policymakers to adopt a policy mix prioritising the delivery of sustainable, investment-led growth and development.

Unctad recommended that central banks strengthen international co-ordination with a greater focus on long-term financial sustainability for the private and public sectors, and not just on price stability.

Investment in the energy transition in developing countries must be actively pursued, by making technology and finance available and affordable, it said. This requires stronger multilateral co-operation and appropriate agreements in the World Trade Organisation, the International Monetary Fund and the World Bank.

"In light of growing interdependencies in the global economy, central bankers should assume a wider stabilising function, which would help balance the priorities of monetary stability with long-term financial sustainability," Unctad said.

As seen in recent better-than-expected economic data, China's economic growth engine is firing up again. Retail sales handily beat expectations in August, while industrial production growth edged higher as well. More importantly, credit extension from banks to households and firms has recovered, quelling concerns that firms & households are shying away from credit. Trade, on the other hand, a driver of growth during the lockdowns last year, remained under pressure in August as the global manufacturing sector stalls.

Recent data outturns suggest that the recent policy tweaks in both monetary policy and in the property sector have stabilised economic activity, after the slump in Q2 and in July. However, the lack of broader fiscal stimulus raises doubt on the sustainability of this improvement, and the economy could turn south again in short order if the property sector fails to improve and the slowdown in the global economy turns more severe.

Policy support measures thus far (listed below) have failed to convince investors that the authorities are taking decisive action to boost growth. This has been reflected via a weaker yuan and capital outflows as a streak of disappointing data heightened bearish sentiment on China's economy. Nevertheless, officials did ramp up their efforts to prop up capital markets after the heavy outflows by tweaking the fastest levers (i.e., monetary and property policies), and addressed hidden local government debt financing vehicle problems through debt swaps.

July 31: NORD publishes a wide-ranging policy document, focusing on removing government restrictions on consumption such as car purchase limits, improving infrastructure and holding promotional events

August 2: PBoC vows to reduce interest rate and downpayment for new mortgage and lower existing mortgage interest rate

August 2: China tells local government to sell all new special bonds by end of Q3

August 2: Tax-exemption to SMEs/preferential income tax for VCs/startups

August 4: PBoC vows funding support for the private sector

August 10: China lifts ban on group tours to U.S. and other countries in boost to global travel Industry

August 11: China allows provincial-level governments to sell U$139B in bonds to repay LGFV debt

August 15: Cut 1Y MLF by 15bps to 2.5% and 7D RR Rate by 10bps to 1.8%

August 21: 1Y LPR lowered by 10bps, 5Y LPR unchanged.

August 25: China rolls out major mortgage easing for homebuyer support

August 27: China cuts stamp duty, increases margin financing to boost equity market

September 14: China cuts banks' RRR by 25bps for 2nd time this year

From the lack of action on the fiscal front, our main takeaway is that authorities are steering away from a focus on growth targets and toward addressing the structural problems in the economy (e.g., leverage, property sector). Consequently, we now re-assess our view of Chinese fiscal stimulus (we had earlier expected a sizeable fiscal package) and look instead for authorities to provide only an extra CY500B in special local government bond quotas this year.

Authorities are likely cognizant that the absence of strong fiscal inputs implies GDP growth this year and next could be below its historical average but appear unfazed. Perhaps policymakers are shedding their singular growth pursuit mindset and instead prioritising economic reforms to ensure long-term sustainable economic growth after the ensuing debt problems from legacy economic policies. As such, we expect GDP growth for 2023 to be 4.8% (below the official growth target of 5%), though the big uncertainty is on our 2024 growth projection of 4.4%. Our forecasts are a touch below the Bloomberg consensus of 5.1% for 2023 and 4.5% for 2024 as most analysts agree that the lack of clear fiscal support is a headwind to economic growth next year.

As we approach year-end, the window is narrowing to put stimulus to work to jumpstart the economy, while the poor economic performance in Q2 and July argues that officials can't step back from policy support. To meet our GDP growth forecasts, we expect the following from China officials:

One RRR cut in Q4 and one LPR cut in Q4.

Central Government tops up special local government bond quotas by CY500B.

Officials put budgeted funds to work more quickly after the lagged fiscal implementation thus far, and fiscal drag turns into a driver. There is room for CY4.4T in spending to be put to work between August to December this year.

Policymakers are betting that a loosening in property sector restrictions (e.g., broadening the definition of first-home mortgages) will have powerful ramifications for the economy through the housing and consumption channels. Unquestionably, the rollback in restrictions in Tier 1 cities by local officials such as Guangzhou, Beijing and Shanghai were more aggressive than most expected initially. This sent a strong signal to local officials in other Tier 2/3 cities to cut restrictions, as the central government appears willing to stomach increased property-market speculation now to anchor sales.

At a national level, the PBoC and the National Administration of Financial Regulation allowed borrowers to negotiate a lower mortgage rate for existing first-home mortgage loans. The rate cut to existing mortgage loans should boost consumption to a certain extent as borrowers on average may register a ~80bps reduction in the loan rate. The total annual interest payment savings may amount to CY200B/year, around 0.5% of total annual retail sales.

Fiscal policy drag has also likely compounded China's poor economic performance on top of the weakness in the property sector and downbeat sentiment. By our estimates, China's fiscal stance is tighter by almost 2% in the first 7 months of 2023: the fiscal deficit stands at -2.3% of GDP YTD (as of July 2023) in contrast to -4.3% of GDP over the same period last year.

On the monetary policy front, we expect one more RRR cut in Q4 to free up cash from banks for onshore investors to absorb the upcoming special local government bond issuance. The new PBoC Governor Pan also appears decisive in supporting the economy through monetary easing, following closely to the guidance at the July Politburo meeting, and we expect one more LPR cut in Q4.

Even as the economy recovers, it is likely to be a gradual one fraught with headwinds due to the beleaguered property sector situation and the slowdown in the global economy. Major Chinese developers are still plagued by financial troubles, fighting to avoid bond defaults while developers' financing has failed to register any marked improvement. Factoring in our nowcast estimate of Q3 GDP of 4.5% y/y, we now expect 2023 GDP growth to be 4.8%, though the big uncertainty is on 2024 growth of 4.4% given the lack of fiscal support to date.

In summary, if upcoming economic data (especially retail sales and property sales) still disappoint authorities' expectations, we expect the Chinese leadership to have a lengthy discussion on the pulse of the economy. This could take place at the upcoming 3rd Plenum of the 20th Central Committee which could be held as soon as next month and typically lays out the key planned economic reforms for the next five years.

For more than three years now, all the basic rules of budgetary responsibility in the European Union have been effectively switched off.

In March 2020, at the beginning of the Covid-19 pandemic, the EU activated the so-called general escape clause from the application of budgetary rules. But let us not be fooled. It has been years since the basic canons of responsible fiscal management have been applied and enforced. And, at least until the end of this year, nothing will change.

Right now, the question is what happens next. What kind of fiscal rules will we wake up to on January 1, 2024? Will we return to the existing rules or create new ones?

For an unprecedentedly long period of time, all the common European principles of sound fiscal policy have been virtually nonexistent, and yet there is no major political debate about it. No one is criticizing their switch-off and calling for a return to responsibility, and the fact that many of the more enlightened commentators have not even noticed the shift says a lot about the budgetary rules themselves. They were soft from the start and have been further softened by long-term use. Why?

First, a bit of history. As I have explained elsewhere, at the beginning of deeper European economic and monetary integration, the prospective members of the single European currency area adopted a set of principles designed to curb the budgetary profligacy and irresponsibility of national politicians. Discipline was supposed to be ensured by upper limits on annual public budget deficits (3 percent) and maximum levels of public debt (60 percent). It was also stipulated that a country exceeding these levels for at least three consecutive years must make corrections and could be fined up to 0.5 percent of gross domestic product (GDP). These relatively simple rules were laid out in 1997 and have been fully operational since 1999, the year the euro was launched. They are called the Stability and Growth Pact and are an integral part of the European legal order.

Their main purpose was to ensure the dominance of monetary policy: a situation in which decisions on interest rates or exchange rates by the central bank are not hostage to irresponsible budget management by governments. In such a situation, debt problems in one part of the EU do not prevent stabilization in another part, and do not spill over to neighboring countries. In short, the rules were meant to be a barrier to simple cross-border free riding, where irresponsibility in one state becomes a financial problem for all the others.

Right from the start, however, the Pact seemed to be failing. For how to enforce such strict and highly restrictive policies among sovereign countries? In hindsight, rather disheartening analyses from EU core institutions show that compliance with the budgetary rules between 1998 and 2019 occurred only about half the time.

The big blow came in 2003, when France and Germany, two key EU countries, both broke the rules but were not punished. Unlike earlier cases involving smaller countries, Paris and Berlin were not even threatened with sanctions. The European Commission did not have the courage to punish two large EU countries at once. Everyone else, however, interpreted this to mean that the rules are both unfair (because they do not apply evenly to big and small) and unenforceable, because even a small country cannot be threatened with an armed intervention to revert fiscal discipline.

All that is left now is the obligation for each country to submit the parameters of its budget in the spring of each year to the European Commission for evaluation and recommendations, which are then generally ignored.

Over time, the rules have thus become general theoretical guidelines, and have been further modified and made more complex. In 2005, for example, the so-called medium-term objective (MTO) rule was added. In order to allow budgetary policy to take into account the business cycle, the so-called “cyclically adjusted deficit” should not exceed one percent of GDP in the medium term. Simply put, in bad times the deficit could be higher and in good times it should be lower. Again, there are corrective measures in the event of a series of noncompliance with this rule and a mandatory return trajectory. The problem from the outset has been that this rule is based on a marker called potential output, which cannot be directly measured, only estimated. To make things worse, estimates can change significantly over time. How do you design a good forward-looking policy when you are aiming at a moving target?

After the eurozone fiscal crisis in 2009 – a result of disrespect for the rules mentioned above – further adjustments and modifications were made. In 2011, the so-called six-pack reform was adopted, which was meant to address not only budgetary irresponsibility, but generally all macroeconomic imbalances in EU member states, such as real estate bubbles or large surpluses or deficits in foreign trade. It has not succeeded. The subsequent two-pack reform, applied exclusively to the euro area, was in turn supposed to put more control on the growth rate of public spending. The most recent reform, in 2015, then gave the European Commission the power to assess and recommend structural changes in individual countries more rigorously. The goal was to ensure their return to sustainable levels.

The whole series of adjustments, flattening and decluttering was really just an admission of the obvious: a common monetary policy without a single fiscal policy is difficult by definition. (The rules of sustainable fiscal management apply of course to all EU countries, even those that do not pay the euro; every EU country can theoretically adopt the euro at some point, and economic policy is a matter of common interest for all members.) Some pipe construction and design faults cannot be repaired even by very determined plumbers. This was rightly feared by many of the eurozone's architects, especially in northern countries.

So what are the end results of more than 20 years of EU and eurozone life with fiscal rules? A sobering summary is provided by the chart below.

The rules are more complex and opaque than ever, while governments continue, with honorable exceptions, to accumulate new debt. Debt-to-GDP levels are higher today than they were when the euro project was launched. And, paradoxically, it is euro countries that have, on average, higher debt levels than those that have retained their own currency.

The euro area, for which the rules were primarily designed, has a long-term debt-to-GDP ratio above the 60 percent ceiling set in the Stability and Growth Pact. It is therefore confirmed that a national currency can be a stronger shield against profligacy and overspending, as it does not allow easy free riding and transferring the costs of irresponsible policy across borders.

Except for a small group of countries such as Bulgaria, Denmark, Sweden or Malta, EU states are generally more indebted today than they were in 1999. And it seems that life in the EU, especially since the great financial crisis of 2008, has become an endless series of successive crises that always provide a good rationale for why the rules do not have to be respected.

In this dismal situation, the EU has recently begun to debate how to reform and change the fiscal and economic rules again. In April this year, after a lengthy debate, the European Commission published a set of proposals for a major reform of the Stability and Growth Pact. The reform is intended to change both the rules for preventing fiscal crises and the ways in which past breaches are corrected. At the same time, they are to increase the weight and power of the so-called Independent Fiscal Institutions (IFIs), which are independent public bodies in each country that provide a politically unencumbered picture of the state of public finances and their longer outlook (the author of this text leads just such an institution in Czechia).

According to the new proposal, member states should regularly submit national medium-term plans based on a single indicator, namely the limit for net spending. This refers to the total amount that a government can spend in each period to achieve the planned objectives. In simple terms, the plan should ensure that debt is on a downward trajectory over the next four to seven years and the deficit is below 3 percent of GDP. Deviations from the planned net expenditure will then be assessed each year. Member states will effectively be redefining the rules on their own to achieve the fiscal sustainability objective. This would shift the focus from the short to the medium term and strengthen national ownership of stability. It would entail a fair acknowledgment of the fact that previous enforcement of the rules has failed, because the substantive decisions on budgets are made at the national level anyway.

The new rules are still being cooked and seasoned, so there are still many uncertainties. For example, under what conditions will a member country be able to request that the correction period of its budget exceed the basic four years? And also, how exactly will net expenditure be defined, meaning which expenditure will not count toward the limit? (Decarbonization costs, or one-off expenditure on defense?) The scope for budgetary creativity could be large.

However, the basic lesson remains the same. In principle, the rules of budgetary policy, which underpin any national political process, cannot be effectively enforced among sovereigns. There is no substitute for a country consciously pursuing fiscal responsibility at the national level. Nor will the creation of new institutions bring about better public finances. Genuine fiscal rectitude is the greatest virtue in a club that shares a currency and an economic destiny. But that is exactly what is critically lacking in the EU these days.

How much has Giorgia Meloni changed since she became the Italian prime minister? Before she assumed office, Ms. Meloni was dreaded abroad, cast as a “European Trumpist” at best. Nearly a year later, she seems to have developed a friendly relationship with American President Joe Biden. Besides Poland, Ms. Meloni has secured Italy as the White House's strongest European ally, keeping the country where Mario Draghi positioned it.

Ms. Meloni was born in 1977. This simple fact suggests she is unlikely to be the nostalgic of fascism described in the international press. Her account of why she entered politics, and why she joined the party at the far right of the political spectrum, is that it was a reaction to the Mafia killing of prosecutor Paolo Borsellino in 1993, when she was 16. In other words, she was called to politics by a need for law and order. Ms. Meloni does not come from a well-off family, nor a traditional one; her mother was effectively abandoned, along with two daughters, by her husband, a man later implicated in shady businesses in Spain.

The prime minister's career has resembled those of old-fashioned politicians. Though she emphasizes her willingness as a young woman to accept simple jobs to make a buck, like babysitting, she quickly found the tenure track of a professional lawmaker. Ms. Meloni went from being a mascot for fellow party members to having a seat in Parliament, becoming vice president of the Chamber of Deputies and then minister in the final Silvio Berlusconi government. As a 31-year-old minister of youth affairs, she was the youngest minister in Italy's history.

In this formative period, she seemed closer to what is known as destra sociale, the “social right.” This concept identifies a blending of nationalism with corporatism, in the sense of a mixed economy managed by the government (though it claims to operate on behalf of “intermediate bodies,” like trade unions). As such, Ms. Meloni did not follow Gianfranco Fini – her mentor and the secretary of the National Alliance, the party that evolved out of the post-fascist Italian Social Movement – who attempted to rebrand himself as a liberal centrist.

Instead, she remained loyal to Mr. Berlusconi, even as his party and Mr. Fini's merged – until, with the caretaker government of Mario Monti, she broke off and established a new social-right party. The Brothers of Italy (Fratelli d'Italia, or FdI) was a bold bet, initially seeming doomed to single-digit vote shares. Yet, from the beginning, it was an oddity in Italian politics: the furthest-right party was also the only one led by a woman.

This short summary of a long political history may help explain why Giorgia Meloni was at first seen by many as an extremist. The fact that she was an experienced, career politician was often forgotten. What stuck with foreign journalists was her rhetoric – similar to that of Lega's (formerly the Northern League's) Matteo Salvini, though in some sense more sophisticated.

Mr. Salvini made a political fortune out of his hostility to immigration, which he peppered with vague, economic euroskepticism. Yet his insistence that Italy had to quit the euro was never fully shared by his party's base, which included mostly northern Italian small business owners, rentiers and pensioners – voters who might be culturally conservative, but who also preferred prudence in economic matters. The Lega leader's once incendiary rhetoric did not prevent him from loyally supporting a government led by Mario Draghi. More tactician than strategist, Mr. Salvini seemed to have little trouble watering down his wine.

Conversely, Ms. Meloni's defense of Italian borders from immigrants was rooted in a more clearly nationalist understanding of the country's identity – her taste for law and order seemingly inherent to her political history. On economics, she opposed austerity and supported a more interventionist state, consistent with her cultural roots and with the expectations of her traditional voters, drawn mostly from the south and the public sector. In foreign policy, her party's history is no stranger to anti-Americanism.

After World War II, the post-fascists could not support Soviet Russia, but neither they were totally aligned with the United States. Later, the “social right” had little sympathy for American culture, which was associated with consumerism and unfettered (by European standards) capitalism. At the same time, right-wingers always admired French General Charles De Gaulle and his geopolitical vision for a Europe independent of the two Cold War blocs.

Before the last election, the FdI had never articulated a full-fledged economic agenda. Their sympathies for interventionism were balanced by the need to grow support among the business community. The party was long staffed by political personnel accustomed to vote shares in the single digits, and accordingly did not have many experts within its ranks. This is a problem to keep in mind: the party's support outgrew its ruling class.

To be sure, this is a group not altogether lacking talent. But since economics was never the party's forte, its most successful elements tend to come from other domains than the business world. One example is a conservative defense of the “traditional” family, an early Meloni battle cry that has become a sort of personal slogan, following a memorable (or, for her opponents, infamous) speech she gave to Spain's rightist Vox party. Culture wars have been and remain critical to the prime minister – and particularly the task of reversing Italy's demographic decline, which the government has tackled mostly by devising subsidies to families with newborns.

In the 2022 election, Ms. Meloni ran knowing she would be leading her coalition's biggest party, and hence that she would become the prime minister if victorious. Her popularity was boosted by opposition to Covid-19 restrictions. During the race, many detected a metamorphosis: the professional politician trumped the populist campaigner. Ms. Meloni softened her tone, as if anticipating the burden of future responsibilities.

In particular, she took a prudent stance on public finance, keeping campaign promises to a minimum. She also emphasized a shift in her cultural pantheon, one undertaken a few years before. While Ms. Meloni had never mentioned a favorite author – besides references to fantasy writer J.R.R. Tolkien, whose “The Lord of the Rings” has become a reference point for the Italian right as a challenge to the modern world – she began invoking the authority of British philosopher Roger Scruton. She proved she could master English, by participating in a few events held by the National Conservatism movement. She positioned herself at the helm of the European Conservatives and Reformists, a European Parliament party that had included the British Tories.

In a few years, the social rightist actually moved in the Anglo-Saxon direction. This may help to explain her position on the Ukraine war. In part, it is political realism: no Italian prime minister could seriously contemplate putting the country outside the American fold. But it was also partly the result of a personal evolution. Ms. Meloni no longer considered the Americans as culturally different, coming to appreciate the strength of Anglosphere conservatism. Her very usage of the word “conservative” was at first an oddity: Italy never had self-proclaimed conservatives (a term long avoided by the right wing).

Of course, this provoked some uneasiness on the right. A few social rightists have left the FdI to imagine alternative movements, ones remaining loyal to a more anti-American stance. Their potential for electoral success looks limited – but so did Ms. Meloni's, at first.

Yet one should not exaggerate the prime minister's ideological journey. Roger Scruton, after all, was more a cultural conservative than an economic one, and not altogether skeptical of the use of political power. Ms. Meloni seemed to have moderated her law-and-order attitude by appointing Minister of Justice Carlo Nordio, known for efforts to curb the power of prosecutors and supporting more dovish, rule-of-law principles in the criminal justice system.

On public finance, Ms. Meloni dutifully tapped one of her few genuine experts, Maurizio Leo, to serve as deputy minister of the economy. The chief economy minister post is held by Giancarlo Giorgetti – a Lega moderate rumored to be clashing with party leader Salvini – who presented a fiscally conservative budget law last year. Ms. Meloni has also insisted on reforming the “citizens' income” introduced by the Five Star Movement, an ostensible poverty subsidy that has been plagued by fraud.

But other economic choices have been more consistent with her social-right roots than the brand of conservatism offered to international partners. Over the years, the so-called “golden power” – a special government authority to limit or block foreign direct investments and corporate transactions involving Italian assets deemed as strategic – has been applied more widely. Ms. Meloni did not stop the trend but has reinforced it. She mimicked a tax implemented in Spain by socialist leader Pedro Sanchez on banking “windfall profits,” portrayed as retaliation against banks' delay in increasing account interest rates after the European Central Bank raised rates.

She has also scrutinized the use of flight-pricing algorithms by airlines and banned their use for internal flights between the Italian mainland and Sicily and Sardinia, declaring a sort of war on the law of supply and demand. The premier renationalized Italy's telecom grid, having the economy ministry invest in it together with the American fund KKR. As the left pressed the case to introduce a legal minimum wage – which Italy currently lacks due to deeply rooted collective agreements between trade unions and business associations – Ms. Meloni has appeared eager to implement some version of that proposal.

As speculation about whether or not the Fed will hike one more time goes into overdrive, the latest report on the US consumer price index will be the big highlight of the week. With the next FOMC decision less than four weeks away, there is a sense of driving blindfolded for both policymakers and traders amid conflicting data on where the economy is headed.

The September CPI report could clear some of the fog away on Thursday, or it may only add to the confusion. Headline CPI edged up in the previous two releases, rising to 3.7% y/y in August. The recent jump in gasoline prices was the main contributor to the increase and the month-on-month gain in CPI accelerated to 0.6% in August.

Forecasts point to a slight moderation in September to 0.3% m/m, but the annual figure is expected to have ticked up further to 3.8%.

Markets might well interpret this as a sign the effects from the energy price spike are beginning to level off, so unless the CPI numbers come in hotter than expected, they’re not likely to react negatively.

However, the core CPI print will also be important, if not more, as it strips out any distortions from food and energy prices. Core CPI has been steadily declining over the past 12 months and is forecast to have eased further to 4.1% y/y in September, potentially adding to the view that inflationary pressures are receding.

Heading into the CPI report, though, the mood will be determined by the producer price index as well as the minutes of the Fed’s September meeting that are due on Wednesday. The Fed may have kept rates unchanged at the last meeting, but a string of policymakers have since been beating the hawkish drum so loud that Treasury yields have skyrocketed to new cycle highs.

The 10-year yield briefly hit a 16-year peak of 4.88% last Tuesday, turbocharging the US dollar. Investors will likely weigh out concerns in the minutes about a slowing economy against fears of inflation firing up again. If Fed officials are less worried about a slowdown than sticky inflation, yields could climb to fresh highs. However, any boost to yields and the dollar will not be sustainable unless it’s followed up by a hot CPI report.

Finally, the University of Michigan’s preliminary consumer sentiment survey will be watched on Friday, particularly, the readings on inflation expectations.

The pound has been hammered lately by a combination of a resurgent US dollar, the Bank of England’s unexpected dovish tilt and a bleaker outlook for the UK economy. In the process, sterling has lost its crown as the year’s best performer in the FX arena.

However, it hasn’t been all doom and gloom on the economy. The Office for National Statistics recently published revisions to its GDP calculations and it is now estimated that the British economy is 1.8% larger than it was before the pandemic compared to the previous estimate of being 0.2% smaller, putting the UK in no worse position than its major European counterparts. In addition, the September services PMI was revised up sharply in the final reading, easing fears about an imminent recession.

Yet, the pound hasn’t been able to stage much of a rebound. This suggests that investors remain downbeat about Britain’s growth potential and that sterling’s main advantage versus the greenback before the BoE’s shock decision to pause was that rates in the UK would peak above those in the US.

Thus, Thursday’s barrage of data on monthly GDP output and production as well as trade are unlikely to have a significant bearing on the pound’s near-term prospects other than a knee-jerk reaction. As long as a soft landing remains the base case scenario for the US economy, there will either have to be a series of upside surprises in UK growth indicators or downside surprises in inflation to shake off the stagflation risks pinning cable down.

Another hope for those currencies that have been badly bruised by the US dollar is if there’s a turnaround in risk sentiment. In particular, risk-sensitive currencies such as the Australian dollar might be able to pare some of their recent losses if there’s some upbeat data out of China. However, the forecasts suggest otherwise.

Producer prices in China are expected to have fallen by 2.4% y/y in September versus by 3.0% in August, pointing to a mild improvement in demand for goods churning out of Chinese factories. Meanwhile, the yearly CPI rate is projected to have quickened only marginally to 0.2%.

Friday’s releases will also include trade figures, with exports forecast to have dropped 8.3% y/y in September, making it the fifth straight month of decline.

Any promising signs of a rebound in China’s economy from better-than-expected numbers would also aid equities, as well as crude oil prices, which took a tumble in the past week.

Even the euro stands to gain from positive China-related headlines in the absence of any other developments. The European Central Bank is set to publish its account of the September policy meeting on Thursday but it’s doubtful whether it will have much of a market impact.

ECB policymakers have been very active post the meeting, providing plenty of commentary, and the doves appear to have become more vocal lately calling for a pause in rate hikes. It’s likely therefore that even if the minutes maintain a tightening bias, investors will consider them as outdated.

As I write today, most markets are in the red, with a spike in risk aversion following the downgrade of US government debt by credit rating agency Fitch. Is it a game changer? Certainly not: S&P did the same a decade ago, and it doesn't look irrational at all. But the market reaction, is another reason for us to think that unpredictability is the norm, for this year at least. As a consequence, we do not spend too much effort trying to make predictions, but we focus on positioning portfolios so that they can weather as many market situations as possible.

Now, let's forget the current -3% drop of the early days of August. So far this year, unpredictability has actually been very kind with investors. While most Wall Street superstars were expecting US stocks to be pretty much flat, they are still up 18%, closely followed by most other developed markets. Emerging market equities are also clearly in the green, and Dubai's DFM general index is up 20%. Stocks are not alone: in the first seven months of the year, all major asset classes are positive. The safest of them, money market funds, with absolute liquidity and quasi neglectable risk, returned almost 3%. Our own multi asset strategies are up respectively around +6%, +9% and +12%, which is, to be honest, better than our own expectations.

Are markets totally disconnected from the realities of a troubled world, running into the lethal combination of unsustainable debt and slowing activity? Or are we just crossing the end of the proverbial tunnel, recovering from the inflation shock, and entering an era of prosperity where central banks will become market-friendly again, and where artificial intelligence will turbocharge economies? Should we basically sell everything except money market funds and gold, or buy everything except money market funds and gold?

You already know where I'm going. But let's give it a bit of context. 2023, which we called the "year of unpredictability" in January, is all about the relative trajectories of inflation and growth, with central banks' action in the middle, especially in the West. The 2023 rally is the combination of two factors. First, a consensus has been building on a "soft landing" scenario in the West: moderating inflation, resilient activity. Second, and it shouldn't be overlooked, a vast majority of investors were defensively positioned. Pessimism turned into hope, spurred by a stream of positive news on growth and inflation, some signs of inflexion in central banks' tone, as well as by stimulus measures in China. The same Wall Street superstars unanimously revised their year-end targets higher (I'm not blaming them, we did the same), and the pressure on conservatively positioned investors became unbearable.

Of course, explaining the past is easier than predicting the future. The key point here is that the broad market view, either explicitly or implicitly, has morphed from pessimism to some degree of confidence: inflation has most probably peaked, global growth is not so bad, especially in the US with a solid job market, central banks are not far from pausing, and the Q2 earnings season so far beats expectations.

This sentiment change is not a strong signal. We remain perplex. While investors' positioning and Western stock markets' valuations limit the possibility of another parabolic rally in the coming months, they are not extreme enough to turn outright bearish. As both inflation and growth have defied all forecasters, including central banks, in the last 18 months, there is still a wide range of possible scenarios. Among them, one is a nightmare: a reacceleration of inflation. This would require more monetary tightening, pressure all asset classes, heighten financial threats, and annihilate risk appetite. We do not expect it - nobody does. The response to this low probability, high damage situation is to maintain a reasonable level of liquidity, and to be vigilant, ready to act. Now, assuming inflation continues to moderate, even slowly and erratically, the uncertainty is on growth. Our own consensual assumption is that activity will continue to slow in the West, and that the risk of a recession is material in 2024, but not necessarily a severe one. If we're right, safe bonds would do well. Stocks won't initially like it, but as always, once central banks turn friendly again, they would recover. Now, if we are wrong and growth is faster, equities will have all reasons to remain supported, especially where they are not too expensive while being exposed to the global cycle: emerging markets come to mind.

2023 is the year of unpredictability, which means perplexity when it comes to investment decisions. This is not that bad, it avoids speculation. We started the year by materially increasing our exposure to developed markets stocks, which did great. The reason is not that we predicted the rally; we didn't. Being perplex, we simply reviewed our strategic asset allocations, feeding quantitative models with the updated parameters after the horrendous 2022, to build the best possible "scenario agnostic" portfolios. And we just implemented the results. Avoiding radical bets when conviction is low is as unspectacular at it is underrated. All you need is a robust asset allocation and a long-enough time horizon to allow fundamental factors to work. Our tactical positioning is now modestly defensive: we overweight money market funds for their multiple virtues, and both safe fonds and emerging market stocks to maximize diversification in the various growth scenarios. We underweight riskier bonds and most alternatives. Until we have a real conviction.