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Week Ahead: Macro and Prices

The market has much to digest. The Bank of England’s new purchases of Gilts coincided with a reassessment of the trajectory of Fed policy. After the hawkish…

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The market has much to digest. The Bank of England's new purchases of Gilts coincided with a reassessment of the trajectory of Fed policy. After the hawkish FOMC decision and forecasts, the market briefly thought the terminal rate could be 5.25-5.50% in the middle of next year. However, by the end of last week, it had returned to around 4.5% at the end of Q1 23. Italy has a right-wing government, and what it means for the country's debt and relationship with the EU are being debated. The cabinet will begin taking shape, and it could help shape investors' expectations. Italy's premium had jumped 30-40 since a little before the election.  

The rapid referendums in eastern Ukraine and Russia's annexation of the territories, after taking Crimea in 2014 point to a new phase in the conflict. Some observers are linking Russia's mobilization and rush for a referendum--even by its trumped-up standards, to the meeting with China's Xi rather than the setback of Russian forces at the hands of the Ukrainians armed to the teeth with US weapons and intelligence.  

Sometimes the narrative is about macro developments, but recently the price action itself has been the narrative. Central banks from several emerging markets are believed to have intervened to support their currencies, and Japan became the first G10 central bank to materially protest what the market was doing with the yen (still to be sorted out if it was about a level--less likely--than the one-way market--more likely). It looks like the initial estimates of a record JPY3.0 trillion (~$21 bln) was fairly close. BOJ figures suggest it was closer to the JPY2.85 trillion, which seems like a lot for a few nights of sound sleep. Still, the pullback in US yields helps protect the JPY145 level.  

Sterling's collapsed the new government's mini-budget spurred the Bank of England to comment. It was monitoring developments and would take the necessary measures to bring inflation down, and review both fiscal policy and sterling at its November 3 meeting. However, seeming to rule out an emergency meeting, which did not validate the sense of urgency seen by investors and businesses weighed on sterling. Yet, when systemic risks arose, the BOE stepped in. It announced a bond-buying program distinct from QE and it seemed to stop the panic. The Gilt market stabilized and sterling recovered to almost where it was before the government's fiscal initiative. The swaps market has a 150 bp hike at the next BOE meeting nearly fully discounted.

The price action in the debt markets is also the narrative.   The US 2-year yield has risen from almost 3.5% at the end of August to nearly 4.35%  in late September. It looks poised to re-test 4.0%. In early August, the US benchmark 10-year yield tested 2.50%. It poked above 4.0% last week before falling back below 3.70% before the weekend. The 10-year breakeven (the difference between the yield of the inflation-protected and conventional security) slipped below 2.10% before the weekend, its lowest since February 2021. The two-year breakeven slipped below 2% at the end of last week for the first time since late 2020.

The two-month rally in US equities indices has fully unwound. Europe's Stoxx 600 and the MSCI Asia Pacific Index also fell to new lows for the year last week. The general re-pricing of assets from a zero-interest rate environment to higher rates is a difficult process and it has become a moving target.  

Oil prices rallied almost 60% in the first half of the year and since mid-June, WTI has tumbled by nearly more than 35%, leaving it up less than 7% for the year. The US retail price for gasoline has risen over the last few days but did slip a little in September, its third consecutive monthly decline. At an average of around $3.80 a gallon, it has risen by slightly more than 15% since the end of last year. A broader measure of commodity prices, the CRB Index, has also pulled back since the mid-June peak. It has fallen by nearly 20%.  

There are a few data points next week that do stand out. First, is the US jobs report. The median forecast in Bloomberg's survey is for a 250k increase in non-farm payrolls, which includes an estimated 13k net loss of government jobs. The numbers have been so distorted by the shutdown and re-opening and shifting preferences that it may be difficult to know what is a normal number. In the four-year before the pandemic, the US averaged less than 200k additions a month. That means that the 250k median forecast (Bloomberg's survey), which would be the least since December 2020 will likely be seen as a robust figure by Fed officials.  

Of course, there are other dimensions that will be watched. These include the unemployment rate (which rose to 3.7% from 3.5%), the participation rate (increased to 62.4% from 62.1%, to match the highest since March 2020), and the average hourly earnings ( a 0.3% month-over-month increase will slow the year-over-year pace to 5.0% or slightly below). The JOLTS report on job openings appears seems to be attracting diminishing interest, even though Chair Powell still referred to it. Canada also reports September employment figures. It has lost full-time jobs for the three months through August.  

We would make the case for US auto sales being notable too. They are expected to have edged higher, and at 13.5 mln (SAAR) it would be the most since April. Although, through August auto sales are off about 15% year-over-year, a 13.5 mln unit pace September would be the second consecutive month of year-over-year improvement. In the current strong dollar environment trade figures are interesting, though the advanced goods balance report steals most of its thunder. Still, part of the issue is that the Fed does not meet until November 2, and the key for policy is not the real sector, provided the jobs report is broadly in line with expectations, is CPI (October 13).  

Japan's Tankan Survey (October 3) rarely moves the market, and this may be doubly true now as large business sentiment is better than for small businesses. Corporate profits are the highest in more than 50 years as the foreign earnings translate into more yen. Given the policy divergence, and the intervention to support the yen, Tokyo's September CPI will be watched as a good indicator of the national figures. Headline CPI may hold below 3%. The core rate (excludes fresh food) may have edged up from 2.6% in August. This could be the near-term peak, as the supplemental budget will offer new protection from energy and wheat prices and energy prices fall faster than the yen.  

The Reserve Bank of Australia and New Zealand meet. The market is slightly more confident that New Zealand's central bank will hike by 50 bp than Australia's. The RBA has hiked at every meeting since May for a total of 225 bp, bringing the target rate to 2.35%. It is clear that it is not done but it has signaled that after four half-point moves it could slow. Since it last met, the Australian dollar has fallen nearly 4.5% to two-and-a-half year lows near $0.6435. The RBNZ began its tightening cycle last October and has lifted the target rate by 275 bp to 3.0%. The swaps market has Australia's terminal rate between 4.25% and 4.50% in Q3 23. The terminal rate for the RBNZ is seen closer to 5.0%

Let's turn now to the foreign exchange price action. 

Dollar Index:  On September 20, the Dollar Index posted an outside up day by trading on both sides of the previous day's range and settling above its high. The rally that it signaled was completed in the middle of last week as DXY made new 20-year highs and then reversed lower and settled below the previous session's low. This key reversal saw follow-through selling to a new five-day low ahead of the weekend slightly above 111.55. That nearly met the (62.8%) retracement of the advance from September 20 (~111.45). Initial resistance is now near 112.80 and then 113.20. The MACD and Slow Stochastic are rolling over in over-extended territory. The 20-day moving average, the middle of the Bollinger Band is near 110.80.  

Euro:  The euro's recovery off the 20-year low set in the middle of last week (~$0.9535) stalled ahead of the weekend about three cents higher. Like the Dollar Index, it met the (61.8%) retracement objective of the move since September 20. It also stopped shy of the 20-day moving average (~$0.9890). Initial support is seen near $0.9700, and a break of $0.9650 would signal a return to the lows. The MACD firmed slightly last week but it has not established an uptrend. The Slow Stochastic has turned higher and it is still oversold. Parity is a key cap now. 

Japanese Yen:  The BOJ's intervention has helped steady the dollar-yen exchange rate. The market has been reluctant to push the dollar back above JPY145.00.   Since the middle of the week, the greenback has largely held above JPY144.00. The sideways movement has seen the MACD trend lower. The Slow Stochastic has also been trending lower but steadied last week. The pullback in US rates may be a contributing factor to the stability of the exchange rate. After briefly pushing above 4% in the middle of the week the 10-year US Treasury traded below 3.70% before the weekend. The two-year US yield reached almost 4.35% at the start of last week and finished below 4.18%.  

British Pound:  Sterling traded in a wide range last week. It began by extending the route after the new government's fiscal message and falling to its lowest level since the end of Bretton Woods, reaching $1.0350. The BOE's measures to address the threat to systemic stability helped spur a short-covering rally in sterling that lifted to a high at the end of the week of about $1.1235. Recall that it finished the previous week (September 23 near $1.0860 and traded almost to $1.1275 before the mini budget. The pre-weekend high met a technical retracement objective (~61.8% of the leg lower that began on September 13 from almost $1.1740). The momentum indicators have turned higher from oversold territory, and, of note, the Slow Stochastic is leaving a bullish divergence in its wake. While we think the market's response to the fiscal measures, which were largely what Prime Minister Truss had advocated during her campaign was exaggerated, the blow to sentiment was serious. Sterling needs to overcome resistance in the $1.1275-$1.1300 area to signal a deeper recovery, a loss of $1.09 could see $1.0750-$1.0800.  

Canadian Dollar:  Weak US stocks and an aggressive Federal Reserve kept the Canadian dollar on the defense last week. The greenback made a new two-and-a-half-year high near CAD1.3835 in the middle of the week. There was no follow-through USD selling after the key reversal on Wednesday. Support was found near CAD1.3600. The MACD is still rising but is stretched. The Slow Stochastic turned lower. The US dollar rose for its third consecutive week and seven of the nine weeks since the end of July. The Canadian dollar is no longer the best G10 performer this year against the US dollar. It lost top billing to the Swiss franc, which is almost 7% compared to the Loonie's 8% decline. More than half of this year's decline in the Canadian dollar took place in September (~-4.35%).  

Australian Dollar: As we saw with the Canadian dollar, so too with the Australian dollar:  The seemingly favorable price action in the middle of last week did not see follow-through action. Instead, weak consolidation was seen in the last two sessions. The Aussie slumped to a new two-year low near $0.6365 on September 28 and recovered to close a little bit above $0.6520. Before the weekend it traded to almost $0.6450. The MACD is at its lowest level since mid-May, and although it has not turned, it looks poised to do so in the coming days. The Slow Stochastic has curled up and from slightly above the low set earlier in September. Overcoming the $0.6575-$0.6600 area now would lift the tone. The futures market leans (~60%) in favor a of 50 bp hike by the RBA on October 4, essentially unchanged last week. A half-point move would lift the target rate to 2.85%. The terminal rate is seen a little over 4% near mid-2023. The RBNZ meets on October 5. The market is more confident that it hikes 50 bp and again in November, its last meeting year. That would put the target rate at 4%. The terminal rate is seen closer to 5.25% in early Q3 23.  

Mexican Peso:  As part of its broad rally, the US dollar pushed to MXN20.58 on September 28, its highest level in nearly two months. It reversed dramatically low and close that day near MXN20.1255. After the key reversal, there was no immediate follow-through selling, but ahead of the weekend, the greenback fell to new lows for the week around MXN20.09. The MACD is not clear, though the Slow Stochastic is curling lower. Last week, a few central European currencies gained against the dollar (Czech, Bulgaria, and Romania, but not Russia or Hungary), and after them was the peso. The peso's gain of about 0.5%  was enough to ensure a gain for the month, albeit small (less than 0.2%). We suspect there is potential now toward the lower end of the recent range (~MXN19.80).  

Chinese Yuan:  Before the weeklong holiday in China during the first week of October, officials drew the line in the sand. Reports suggested that it put banks on notice that they should be prepared for intervention. How do the banks prepare? Apparently, they cut their long dollar exposure. The dollar fell from CNY7.25 in the middle of last week to almost CNY7.0835 before the weekend. The greenback gapped lower last Thursday and Friday and both times the gap was quickly closed. The dollar settled near CNY7.1150, while against the offshore yuan the dollar finished a little below CNH7.1300. Given the sensitivity and official scrutiny, look for the dollar to trade within recent ranges against the offshore yuan during next week's holiday.  


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Your Lululemon Faves May Not be Around for Long

A sportswear giant is accusing lululemon of patent infringement.

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A sportswear giant is accusing lululemon of patent infringement.

The Gucci loafers. The Burberry  (BBRYF) trench coat. When it comes to fashion, having a unique design is everything. This is why brands spend millions both creating and protecting their signature looks and the reason, as in the case of Adidas  (ADDDF) , extricating a brand's design from creators who behave badly is a costly and difficult process.

There is also the constant effort to release new styles without infringing on another group's style. This week, sportswear giant Nike  (NKE) - Get Free Report filed a lawsuit accusing lululemon  (LULU) - Get Free Report of infringing on its patents in the shoe line that the Vancouver-based activewear company launched last spring.

After years of selling exclusively clothing, accessories and the odd yoga mat, lululemon expanded into the world of footwear with a running shoe it dubbed Blissfeel last March. These were soon followed by training shoe and pool slide styles known as Chargefeel, Strongfeel -- all three of the designs (including a Chargefeel Low and a Chargefeel Mid design) have been mentioned in the lawsuit as causing "economic harm and irreparable injury" to Nike.

Nike's History Of Suing Lululemon Over Design

The specific issue lies in the technology used to build the shoes. According to the lawsuit filed in Manhattan federal court, certain knitted elements, webbing and tubular structures are too similar to ones that had been used by Nike earlier.

Nike is keeping the amount it hopes to receive from lululemon under wraps but is insisting the company infringed on its patent when releasing a shoe line too similar to its own. Lululemon had previously talked about how its shoe line "far exceeded" its leaders' expectations both in terms of sales and ability to expand.

In a Q1 earnings call, chief executive Calvin McDonald said that the line "definitely had a lot more demand than we anticipated."

Nike has already tried to go after lululemon through the courts once before. In January 2022, it accused the company of infringing on six patents over its at-home Mirror Home Gym. As the world emerged out of the pandemic, lululemon has been billing it as a hybrid model between at-home and in-person classes. 

The lawsuit was also filed in the U.S. District Court in Manhattan but ultimately fizzled out.

When it comes to the shoe line lawsuit, Lululemon has been telling media outlets that "Nike's claims are unjustified" and the company "look[s] forward to proving [their] case in court."

Lululemon

Some More Examples Of Prominent Design Battles

In the fashion industry, design infringement accusations are common and rarely lead to high-profile rulings. While Nike has gone after the technology itself in both cases, lawsuits more often focus on the style or pattern on a given piece.

Shein, a China-based fast-fashion company that took on longtime leaders like H&M  (HNNMY)  and Fast Retailing  (FRCOF) 's Uniqlo with its bottom-of-the-barrel pricing, has faced numerous allegations from smaller and independent designers over the copying of designs -- in some cases not even from fashion designers but artists painting in local communities.

"They didn't remotely bother trying to change anything," U.K.-based artist Vanessa Bowman told the Guardian after seeing her painting of a local church appear on a sweater on Shein's website. "The things I paint are my garden and my little village: it’s my life. And they’ve just taken my world to China and whacked it on an acrylic jumper."

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EY Eyes Comeback for Biopharma M&A

EY noted that the total value of biopharma M&A in 2022 was $88 billion, down 15% from $104 billion in 2021. The $88 billion accounted for most of the…

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A recent trickle of mergers and acquisitions (M&A) announcements in the billion-dollar-and-up range suggests that biopharma may be ready to resume dealmaking this year—although the value and number of deals isn’t expected to return to the highs seen just before the pandemic.

2022 ended with a handful of 10- and 11-figure M&A deals, led by Amgen’s $27.8 billion buyout of Horizon Therapeutics, announced December 13. The dealmaking continued into January with three buyouts announced on the first day of the recent J.P. Morgan Healthcare Conference: AstraZeneca agreed to acquire CinCor Pharma for up to $1.8 billion, while Chiesi Farmaceutici agreed to shell out up to $1.48 billion cash for Amryt, and Ipsen Group said it will purchase Albireo Pharma for $952 million-plus.

Biopharmas generated about $88 billion in M&A deals in 2022, down 15% from $104 billion in 2021. The $88 billion accounted for most of the $135 billion in 124 deals in the life sciences. The number of biopharma deals fell 17%, to 75 deals from 90. The other 49 deals totaling $47 million consisted of transactions in “medtech,” which includes diagnostics developers and companies specializing in “virtual health” such as telemedicine. [EY]
EY—the professional services firm originally known as Ernst & Young—recently noted that the total value of biopharma M&A in 2022 was $88 billion, down 15% from $104 billion in 2021 [See Chart]. The $88 billion accounted for most of the $135 billion in 124 deals in the life sciences. That $135 billion figure is less than half the record-high $313 billion recorded in 2019, including $261 billion in 70 biopharma deals.

The number of biopharma deals fell 17% to 75 deals from 90. EY’s numbers include only deals greater than $100 million. The other 49 deals totaling $47 million consisted of transactions in “medtech,” which includes diagnostics developers and companies specializing in “virtual health” such as telemedicine.

We expect this to be a more active year as the sentiment starts to normalize a little bit,” Subin Baral, EY Global Life Sciences Deals Leader, told GEN Edge.

Baral is not alone in foreseeing a comeback for biopharma M&A.

John Newman, PhD, an analyst with Canaccord Genuity, predicted last week in a research note that biopharma companies will pursue a growing number of smaller cash deals in the range of $1 billion to $10 billion this year. He said rising interest rates are discouraging companies from taking on larger blockbuster deals that require buyers to take on larger sums of debt.

“We look for narrowing credit spreads and lower interest rates to encourage larger M&A ($50 billion and more) deals. We do not anticipate many $50B+ deals that could move the XBI +5%,” Newman said. (XBI is the SPDR S&P Biotech Electronic Transfer Fund, one of several large ETFs whose fluctuations reflect investor enthusiasm for biopharma stock.)

Newman added: “We continue to expect a biotech swell in 2023 that may become an M&A wave if credit conditions improve.”

Foreseeing larger deals than Newman and Canaccord Genuity is PwC, which in a commentary this month predicted: “Biotech deals in the $5–15 billion range will be prevalent and will require a different set of strategies and market-leading capabilities across the M&A cycle.”

Those capabilities include leadership within a specific therapeutic category, for which companies will have to buy and sell assets: “Prepared management teams that divest businesses that are subscale while doubling down on areas where leadership position and the right to win is tangible, may be positioned to deliver superior returns,” Glenn Hunzinger, PwC’s U.S. Pharma & Life Science Leader, and colleagues asserted.

The Right deals

Rising interest and narrowing credit partially explain the drop-off in deals during 2022, EY’s Baral said. Another reason was sellers adjusting to the drop in deal valuations that resulted from the decline of the markets which started late in 2021.

Subin Baral, EY Global Life Sciences Deals Leader

“It took a little bit longer to realize the reality of the market conditions on the seller side. But on the buyer side, the deals that they were looking at were not just simply a valuation issue. They were looking at the quality of the assets. And you can see that the quality deals—the right deals, as we call them—are still getting done,” Baral said.

The right deals, according to Baral, are those in which buyers have found takeover targets with a strong, credible management team, solid clinical data, and a clear therapeutic focus.

“Rare disease and oncology assets are still dominating the deal making, particularly oncology because your addressable market continues to grow,” Baral said. “Unfortunately, what that means is the patient population is growing too, so there’s this increased unmet need for that portfolio of assets.”

Several of 2022’s largest M&A deals fit into that “right” category, Baral said—including Amgen-Horizon, Pfizer’s $11.6-billion purchase of Biohaven Pharmaceuticals and the $6.7-billion purchase of Arena Pharmaceuticals (completed in March 2022); and Bristol-Myers Squibb’s $4.1-billion buyout of Turning Point Therapeutics.

“Quality companies are still getting funded one way or the other. So, while the valuation dropped, people were all expecting a flurry of deals because they are still companies with a shorter runway of cash that will be running to do deals. But that really didn’t happen from a buyer perspective,” Baral said. “The market moved a little bit from what was a seller’s market for a long time, to what we would like to think of as the pendulum swinging towards a buyers’ market.”

Most biopharma M&A deals, he said, will be “bolt-on” acquisitions in which a buyer aims to fill a gap in its clinical pipeline or portfolio of marketed drugs through purchases that account for less than 25% of a buyer’s market capitalization.

Baral noted that a growing number of biopharma buyers are acquiring companies with which they have partnered for several years on drug discovery and/or development collaborations. Pfizer acquired BioHaven six months after agreeing to pay the company up to $1.24 billion to commercialize rimegepant outside the U.S., where the migraine drug is marketed as Nurtec® ODT.

“There were already some kind of relationships there before these deals actually happened. But that also gives an indication that there are some insights to these targets ahead of time for these companies to feel increasingly comfortable, and pay the valuation that they’re paying for them,” Baral said.

$1.4 Trillion available

Baral sees several reasons for increased M&A activity in 2023. First, the 25 biopharma giants analyzed by EY had $1.427 trillion available as of November 30, 2022, for M&A in “firepower”—which EY defines as a company’s capacity to carry out M&A deals based on the strength of its balance sheet, specifically the amount of capital available for M&A deals from sources that include cash and equivalents, existing debt, and market cap.

That firepower is up 11% from 2021, and surpasses the previous record of $1.22 trillion in 2014, the first year that EY measured the available M&A capital of large biopharmas.

Unlike recent years, Baral said, biopharma giants are more likely to deploy that capital on M&A this year to close the “growth gap” expected to occur over the next five years as numerous blockbuster drugs lose patent exclusivity and face new competition from lower-cost generic drugs and biosimilars.

“There is not enough R&D in their pipeline to replenish a lot of their revenue. And this growth gap is coming between 2024 and 2026. So, they don’t have a long runway to watch and stay on the sidelines,” Baral said.

This explains buyers’ interest in replenishing pipelines with new and innovative treatments from smaller biopharmas, he continued. Many smaller biopharmas are open to being acquired because declining valuations and limited cash runways have increased investor pressure on them to exit via M&A. The decline of the capital markets has touched off dramatic slowdowns in two avenues through which biopharmas have gone public in recent years—initial public offerings (IPOs) and special purpose acquisition companies (SPACs).

EY recorded just 17 IPOs being priced in the U.S. and Europe, down 89% from 158 a year earlier. The largest IPO of 2022 was Prime Medicine’s initial offering, which raised $180.3 million in net proceeds for the developer of a “search and replace” gene editing platform.

Another 12 biopharmas agreed to SPAC mergers with blank-check companies, according to EY, with the largest announced transaction (yet to close at deadline) being the planned $899 million merger of cancer drug developer Apollomics with Maxpro Capital Acquisition.

“For the smaller players, the target biotech companies, their alternate source of access to capital pathways such as IPOs and SPACs is shutting down on them. So how would the biotech companies continue to fund themselves? Those with quality assets are still getting funded through venture capital or other forms of capital,” Baral said. “But in general, there is not a lot of appetite for the biotech that is taking that risk.

Figures from EY show a 37% year-to-year decline in the total value of U.S. and European VC deals, to $16.88 billion in 2022 from $26.62 billion in 2021. Late-stage financing rounds accounted for just 31% of last year’s VC deals, down from 34% in 2021 and 58% in 2012. The number of VC deals in the U.S. and Europe fell 18%, to 761 last year from 930 in 2021.

The decline in VC financing helps explain why many smaller biopharmas are operating with cash “runways” of less than 12 months. “Depending on the robustness of their data, their therapeutic area, and their management, there will be a natural attrition. Some of these companies will just have to wind down,” Baral added.

M&A headwinds

Baral also acknowledged some headwinds that are likely to dampen the pace of M&A activity. In addition to rising interest rates and inflation increasing the cost of capital, valuations remain high for the most sought-after drugs, platforms, and other assets—a result of growing and continuing innovation.

Another headwind is growing regulatory scrutiny of the largest deals. Illumina’s $8 billion purchase of cancer blood test developer Grail has faced more than two years of challenges from the U.S. Federal Trade Commission and especially the European Commission—while Congress acted last year to begin curbing the price of prescription drugs and insulin through the “Inflation Reduction Act.”

Those headwinds may prompt many companies to place greater strategic priority on collaborations and partnerships instead of M&A, Baral predicted, since they offer buyers early access to newer technologies before deciding whether to invest more capital through a merger or acquisition.

“Early-stage collaboration, early minority-stake investment becomes increasingly important, and it has been a cornerstone for early access to these technologies for the industry for a long, long time, and that is not changing any time soon,” Baral said. “On the other hand, even on the therapeutic area side, early-stage development is still expensive to do in-house for the large biopharma companies because of their cost structure.

“So, it is efficient cost-wise and speed-wise to buy these assets when they reach a certain point, which is probably at Phase II onward, and then you can pull the trigger on acquisitions if needed,” he added.

The post EY Eyes Comeback for Biopharma M&A appeared first on GEN - Genetic Engineering and Biotechnology News.

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IMF Upgrades Global Growth Forecast As Inflation Cools

IMF Upgrades Global Growth Forecast As Inflation Cools

The International Monetary Fund published its latest World Economic Outlook on Monday,…

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IMF Upgrades Global Growth Forecast As Inflation Cools

The International Monetary Fund published its latest World Economic Outlook on Monday, painting a slightly less gloomy picture than three and a half months ago, as inflation appears to have peaked in 2022, consumer spending remains robust and the energy crisis following Russia’s invasion of Ukraine has been less severe than initially feared.

But, as Statista's Felix Richter notes, that’s not to say the outlook is rosy, as the global economy still faces major headwinds.

However, the IMF predicts the slowdown to be less pronounced than previously anticipated.

Global growth is now expected to fall from 3.4 percent in 2022 to 2.9 percent this year, before rebounding to 3.1 percent in 2024.

The 2023 growth projection is up from an October estimate of 2.7 percent, as the IMF sees far fewer countries facing recession this year and does no longer anticipates a global downturn.

Infographic: IMF Upgrades Global Growth Forecast as Inflation Cools | Statista

You will find more infographics at Statista

One of the reasons behind the cautiously optimistic outlook is the latest downward trend in inflation, which suggests that inflation may have peaked in 2022.

The IMF predicts global inflation to cool to 6.6 percent in 2023 and 4.3 percent in 2024, which is still above pre-pandemic levels of about 3.5 percent, but significantly lower than the 8.8 percent observed in 2022.

“Economic growth proved surprisingly resilient in the third quarter of last year, with strong labor markets, robust household consumption and business investment, and better-than-expected adaptation to the energy crisis in Europe,” Pierre-Olivier Gourinchas, the IMF’s chief economist, wrote in a blog post released along with the report.

“Inflation, too, showed improvement, with overall measures now decreasing in most countries—even if core inflation, which excludes more volatile energy and food prices, has yet to peak in many countries.”

The risks to the latest outlook remain tilted to the downside, the IMF notes, as the war in Ukraine could further escalate, inflation continues to require tight monetary policies and China’s recovery from Covid-19 disruptions remains fragile. On the plus side, strong labor markets and solid wage growth could bolster consumer demand, while easing supply chain disruptions could help cool inflation and limit the need for more monetary tightening.

In conclusion, Gourinchas calls for multilateral cooperation to counter “the forces of geoeconomic fragmentation”.

“This time around, the global economic outlook hasn’t worsened,” he writes. “That’s good news, but not enough. The road back to a full recovery, with sustainable growth, stable prices, and progress for all, is only starting.”

However, just because the 'trend' has shifted doesn't mean it's mission accomplished...

That looks an awful lot like Central Bankers' nemesis remains - global stagflation curb stomps the dovish hopes.

Tyler Durden Tue, 01/31/2023 - 14:45

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