Macro Briefing: 27 December 2022

* China takes step toward reopening by ending quarantine for foreign travelers
* Russian foreign minister announces ultimatum for Ukraine
* Ukraine’s foreign minister aims for February peace summit
* Will a faster slide in inflation prevent a recession?
* Inflation changes “safe” withdrawal rate for investment portfolios
* Semiconductor supplies swell as consumer demand for electronics wanes
* Hedge funds had a good year in 2022
* Cash holdings at pension funds drop to 15-year low
* US 10-year Treasury yield enters trading week at highest level in a month:

Easing inflation is starting to look transitory, writes economist Paul Krugman. “What explains falling inflation? It now looks as if much, although not all, of the big inflation surge reflected one-time events associated with the pandemic and its aftermath — which was what Team Transitory (including me) claimed all along, except that transitory effects were both bigger and longer lasting than any of us imagined… Because most renters are on one-year leases, official measures of housing costs — and overall inflation numbers that fail to account for the lag — don’t yet reflect this slowdown. But housing has gone from a major driver of inflation to a stabilizing force.” But “the job market still looks very hot, with wages rising too fast to be consistent with acceptably low inflation.”

Not yet ready for prime time, artificial-intelligence edition: “The only major fund run by AI – AI Powered Equity ETF – has underperformed and attracted low investor interest,” advises Aaron Brown, a former managing director and head of financial market research at AQR Capital Management. “Investors should forget looking for a Skynet or Hal 9000 to run their money at the moment. The best firms are using [machine learning] where it has been proven to work—and perhaps thinking about other applications—but pure ML decision-making has lagged the market.”