Recently, CAPIS held its December research briefing, featuring guest speakers John Fagan and Brendan Walsh, co-founders of Markets Policy Partners (MPP). MPP is a Washington, D.C.-based independent advisory service that informs clients on matters at the intersection of markets and policy, and in the public sector.

Click here for a video of the research call

MPP’s presentation addressed the following topics:

Markets Currently in the Eye of the Storm [3:45]

MPP said the current market peace will yield to headwinds in Q1 and Q2 2023. At present, inflation appears to have peaked, the USD is off its highs and oil prices have dropped nearly 50% since the spring. This calm won’t last. [4:09]

China has eased its “Zero Covid” tolerance policy, allowing the country to begin returning to normalcy. [4:37]

With the U.S. mid-term elections over, there is reduced political uncertainty. [4:55]

As 2023 arrives, expect a transition from calm to storm again as inflation fears turn to recession fears. The Federal Reserve is expected to remain vigilant against inflation and will be hesitant to cut rates despite market expectations. [5:50]

The markets are expecting cuts in interest rates in either Q3 or Q4, but the FOMC is very weary to do this. Markets can expect a lack of growth and stimulus. [6:08]

The FOMC will likely raise interest rates again at the February meeting by 25 bps and could possibly hike again in March. The Federal Reserve doesn’t want to be seen as either soft or behind the inflation curve so expect “obtuse” policy statements. [9:10]

The Fed will aim for a soft landing in Q1 and Q2 and there is fear it will keep rates “too high for too long.” [11:05]

China Outlook [13:20]

Despite rising infection rates as it rolls back the “Zero Covid” policy, China will return to normal – easing supply chain constraints. [13:31]

China will stimulate its economy through easing credit versus stimulus policies. [14:12]

The recovery in China will help the U.S. economy but less so as the two economies divorce from one another. [14:47]

Oil prices are expected to stabilize at current levels as both OPEC remains vigilant towards prices and Russia continues to lean on “oil as a weapon” manta. [15:50]

Politics as Usual [17:05]

With the U.S. Congress divided, markets can expect few new legislative initiatives. Also, if economic headwinds strengthen there will be no fiscal or monetary stimulus. [17:10]

The Congress will work together on Stablecoin regulation. There could be possible cryptocurrency market governance coming too. [17:44]

The debt ceiling debate will continue with the potential for political posturing between the Republicans and Democrats as summer 2023 approaches. [19:10]

FTX Headlines [20:30]

More shoes will drop in this developing event. Doesn’t look like this was “an honest mistake.” [20:40]

So far, there has been no “domino effect” from FTX into the equity markets but other capital markets sectors could be buffeted such as Binance. [21:00]

This could prompt a push for regulatory oversight by Congress – with the SEC seen as the likely source of enforcement. [21:56]

2024 Election Preview [28:20]

The obvious choice for President representing the Republican party is DeSantis. But don’t expect to see former President Trump fade away. [28:38]

Trump is expected to run a Presidential campaign, quite possibly as a third-party candidate, which could siphon off votes for DeSantis. Discussion centers on how to get Trump out of the political picture. [29:08]

President Biden will run again if Trump is the Republican standard bearer. If DeSantis is the choice, then MPP expects President Biden to step aside and yield to other up-and-coming Democratic candidates.  [30:51]

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For questions or to learn more about Markets Policy Partners, please reach out to [email protected] for more updates and insights.