2022 was the year when major central banks ended their easy policies in an effort to fight inflation. Inflation reached levels not seen in developed countries for decades.

For instance, German inflation has reached the highest level in 70 years. As a result, the European Central Bank (ECB) delivered the fastest hikes ever.

It was not only the ECB but all major central banks that raised rates or tightened their policies this year. The last to join the party is the Bank of Japan, as it announced a policy shift this December.

Therefore, everyone agrees that central banks’ rate hikes and high inflation were the dominant themes in 2022. So what would be the global macro themes to watch in 2023?

Inflation to decline to 3% in the US and the euro area

The December inflation report in the United States showed that the prices of goods and services kept rising but at a slower pace. In other words, inflation looks to have peaked.

The last two inflation reports of the year were key to financial markets. Their release triggered intense volatility, and it is becoming increasingly clear that what happens with inflation is a global worry in 2023.

Most forecasters see inflation to 3% in the US and the euro area in 2023. If that turns out to be correct, it means that the two central banks, the Federal Reserve of the United States and the European Central Bank are closer to the terminal rate than the market believes right now.

In other words, if the disinflation trend continues, the terminal rate in the United States is seen at 5.25% in 25% and 2.5% in the euro area.

Central banks to keep tightening until inflation expectations are anchored

The risk to the terminal rate levels is skewed to the upside. Central banks’ communication is likely to remain hawkish even if inflation comes down as expected because they would want to anchor inflation expectations.

Oil prices to increase in a mild recession scenario

Demand for oil is likely to increase in 2023 as China just ended its zero-covid policy. Moreover, the economic slowdown in developed countries is expected to be mild.

As such, demand for oil should increase by about 2.4 million barrels per day, slightly below 2019 all-time highs. But if the global recession turns out to be deeper, then oil demand will take a hit.

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