The key to 2023: inflation and energy prices
The December central bank meetings sent investors a clear message: both the Fed and the ECB are concerned that underlying inflationary pressures may persist despite the encouraging signs we have received recently, especially across the Atlantic. With this in mind, those responsible for monetary policy seem uncomfortable with the recent recovery of the markets, which implies a relaxation of financial conditions that partially undoes the monetary tightening.
For the time being, central banks have managed to cool investor optimism with messages of monetary tightening, but if inflation continues to fall, their capacity to do so will decrease drastically, since investors won't think it likely that monetary authorities will continue to raise rates in a context of clearly downward inflation.
And so, especially in the first half of 2023, investors will be focused on how inflation is trending, which will eventually decide who wins the fight between central banks and markets.
In this regard, we will need to see how energy prices, especially oil and natural gas, evolve, since the current trend to reverse inflation will depend on them.
We are not expecting a further drop in energy prices since there are factors, both short and long term, that suggest that oil and gas prices will remain high, but we do expect them to remain below the levels reached during the summer months.
Among the supply elements to watch, we will have to pay special attention to movements by OPEC, which seems determined to reduce oil output in anticipation of a drop in demand in 2023. Elsewhere, there is significant uncertainty about the effects of the price cap for Russian oil agreed by the members of the G-7, which could pull a considerable number of crude barrels from the Urals out of the market. In the longer term, the industry's incentives to increase production capacity seem limited, in a world in which sustainability criteria will become increasingly important.
As for demand factors, the reopening of China seems the most important, as it would entail a greater demand for fossil fuels, both oil and natural gas. The result is that China's lifting of pandemic restrictions could become a double-edged sword for Europe, since the Asian giant will compete more fiercely for liquefied natural gas. In fact, European countries had an easier time filling their gas deposits this winter thanks to lower Chinese demand, where activity was highly repressed due to the zero-Covid policy.
Of course, we can't rule out worsening geopolitical conditions, which could potentially lead to significantly higher energy prices than today's.
In short, we will have to be very vigilant in 2023 of the dynamics of oil and natural gas prices, since, if they remain at levels similar to those currently in place, this will help underpin the disinflation process, and thus prop up the global financial markets.
