A Fed Blink and a Soaring Deficit: The End of Cheap Money
Adjusting to a new reality
We expect a phase of consolidation in price growth above the Central Bank’s target. Without a recession in sight, there are no strong arguments to believe inflation can dive below 3% this year or in the coming years.
The longer it takes for inflation to move consistently below 3%, the more probable it is that structural dynamics such as higher wages will take hold and reinforce a scenario of inflation above the Central Bank’s target. Looking at the latest inflation numbers, this seems likely.
With this in mind, we believe there are only two possible outcomes for interest rates: either rates remain higher for longer (and probably rise again towards 2025); or the Central Bank gives up on its inflation goal of 2%, allowing for higher inflation levels, admitting defeat in the battle against rising prices.
In that sense, volatility and continuous adjustments in asset prices are still to be expected this year, with the inflation debate at the forefront and prevailing risks of excessively optimistic market views for future financial conditions.
Understanding divergence around the world is also crucial to navigate this landscape. While in the US no apparent signs of weakness in the economy propel the idea of “higher for longer”, in the rest of the world things aren’t quite the same.
The mirage of a soft landing
MacroView in a nutshell: The scenario outlined in our last MacroView has not changed. We still expect higher interest rates and persistent inflation in the mid-term. It has been more than 12 months since economists and markets have been expecting a global recession, but growth remains somewhat resilient (except in China). There seems to be […]
Market Inconsistencies: trading on hope?
MacroView in a nutshell: The scenario outlined in our last MacroView has not changed. We still expect higher interest rates and persistent inflation, despite the likelihood of a downturn in growth towards the end of 2023. The consensus view, suggested by rates in the bond market, is that recession is unavoidable, inflation will eventually recede, […]
Where will inflation stabilize?
Headline Inflation has peaked, but core inflation is still high. Inflation is becoming more structural than cyclical, as we envisioned in our last MacroView.
We see a high probability scenario where Federal fund rates in the US reach 6%, with core inflation stubbornly high until 2023.
We expect an economic slowdown in the US for the coming months that might become a recession in mid-2023.
We expect the U.S. to outperform relative to other economies and we expect USD to resume its upward trend in 2023. This could mean tighter financial conditions worldwide and higher risks of a financial accident outside the US.
In the medium and long term, we still believe we won’t go back to a regime of low growth and low interest rates. Our base case scenario remains the same: a more entrenched and structural inflation problem that could last for years, and an environment of higher interest rates.
Positioning and investment ideas: Long commodities, Long USD, exposure to Credit spreads widening, tactically Long China, Long defensive sectors and income generating stocks on those sectors.
Have we reached peak inflation fears?
Yes, we think we have reached peak inflation fears but only in the short run. Economic activity has begun to slow down (i.e., Atlanta FED’s GDPNow suggests a -1.6% annualized contraction in the US economy for Q2 2022; strong deceleration is also evident in leading indicators in Europe and across the World, Figures 1 & […]