27 June 2023 Economics & Growth | Global

Bilal’s Macroscope: What Consensus Got Wrong in 2023 (So Far)

Summary

Consensus thought the US would have a recession in H12023 – it did not happen. They now expect it in H2.
Consensus got the timing for the China re-opening growth bounce wrong, and they underestimated European Central Bank (ECB) hikes.
Other big misses included GBP, HUF, and MXN strength.
The contrarian trade for H2 is to buy stocks, buy the US dollar, and sell front-end rates.

The US

Calls for a US recession turned out to be wrong. At the start of the year, the consensus of analysts had expected 0% growth in Q1 and negative growth in Q2 – which almost equates to a technical recession. US growth turned out to be much stronger with 1.3% (q/q, annualised) in Q1 and 0.5% estimated for Q2.

Moreover, consensus expected a sharp rise in the unemployment rate to 4.2% by Q2, which also never happened – unemployment instead remains close to historic lows. It follows that the 82% of major banks calling for weaker stocks in H1 were also wrong. The S&P 500 is up almost 10% so far this year.

What about inflation and the Federal Reserve (Fed)?

At the start of 2023, consensus expected core Personal Consumption Expenditure (PCE) to be 3.8% by Q2. It is closer to 4.4%. On the Fed policy rate, both consensus and markets expected it to be 5% by Q2. It is currently 5.25% and could reach 5.5% by the end of the quarter. So, consensus underestimated both inflation and the amount of hiking. As for the dollar, consensus expected EUR/USD to be trading at 1.05 and USD/JPY at 135 by Q2 – which is not too far from current levels.

Meanwhile, despite Q4 GDP being slightly less positive than we had expected, our consistent view that the Fed will need to hike significantly more than market expectations has proven correct. We expect this to continue to be the case.

China

At the start of the year, consensus expected anaemic growth of 3.2% (q/q, ar) in Q1 for China. Thanks to the re-opening it turned out much higher at 8.8%. But optimism for Q2 growth was misplaced – early forecasts for Q2 sat at 6.6%, but it is tracking closer to 4.4%. USD/CNH was forecast to be trading at 7 by Q2, while it is currently trading at 7.07. Overall, consensus got the timing and persistence of the re-opening growth spurt wrong.

Europe

Consensus expected negative growth in the Euro-area in Q1, but growth is estimated to be stronger at +0.4% (q/q, ar). Though consensus predicts Q2 growth of around 0.4% (q/q, annualised). Meanwhile, consensus had forecast the ECB to hike to 3% by Q2. Instead, it will likely be 3.5%, as was our expectation at the start of 2023 (we see them going even further now).

Other Notable Misses

GBP/USD was expected to trade at 1.19, it is currently 5% higher at 1.25.
EUR/HUF was expected to trade at 410 by Q2, it is currently trading 10% lower at 370.
Latam was expected to trade much weaker. At the start of the year, analysts expected USD/MXN to be trading at 20 by Q2 – it is trading 12% lower at 17.5.

What Consensus Expects for H2

US will enter a recession – Q3 and Q4 growth is expected to be negative, and the unemployment rate is forecast to jump above 4%.
The Fed is expected to cut once or twice due to the recession with core PCE falling below 4%.
US stocks are expected to fall 4% with two-thirds of analysts bearish.
The dollar is expected to weaken with the euro rallying to 1.15, USD/JPY falling to 126, and USD/CNY falling to 6.80.
Chinese growth will remain around 4.4% (q/q, ar) for H2 – no slowdown, no pick-up.
The Euro-area will avoid a recession and the ECB will hike to 4.25%

The contrarian trade is to buy stocks, buy the dollar, and short front-end rates.