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Macro Picture – In this article you’ll find:
- Pushing inflation to target now calls for a major recession
- US Economy, Outlook and Risks
- China Economy, Outlook and Risks
- EU Economy
- Global Macro Outlook
- What if the Banking Crisis Is Not Over?
Here you can find other articles:
- Fixed Income – Market concentration impacts perfomance
- Market Perspectives – Rising odds of a higher interest rate
- Is business come back as normal?
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Pushing inflation to target now calls for a major recession
9 crucial view’s point by BlackRock on markets/economy
- “Bond yields rose after data showed a still-tight U.S. labor market. They think that keeps inflation sticky and makes Federal Reserve rate cuts this year unlikely.”
- “They expect a recession to help cool inflation but think the Fed will stop hiking before it gets severe.”
- “BlackRock thinks market pricing is underappreciating persistent inflation and took advantage of the dip in expected inflation in March to up our overweight.”
- “The Fed is sticking to hiking rates to get inflation down to target, even as financial cracks start to appear.”
- “They think the Fed will eventually stop hiking when the damage becomes more apparent. That means it won’t have done enough to create the deep recession needed to achieve its inflation goal, so it will be living with some above-target inflation.”
- “They think the market pricing in repeated rate cuts suggests investors are underestimating inflation’s persistence and expecting central banks to come to the rescue.”
- “BlackRock thinks policy rates are near their peak, yet they don’t see the Fed coming to the rescue with rate cuts.”
- “The Central Banks are instead engineering a slowdown that would push up the unemployment rate – and bring down wage growth.”
- “The Fed’s own projections call for a 1 percentage point increase in the unemployment rate by the end of the year.”
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Growth and Inflation Forecasts
- Inflation remains too high, but the primary driver has switched from goods to services. Because services prices tend to be more persistent than goods prices, that rotation means inflation is likely to stay higher for longer.
- Rate hikes from earlier this cycle are already weighing on activity, most notably in the housing market. Alliance Bernstein expects that impact to persist and for the slowdown to broaden into other sectors of the economy.
- Rate hikes are set to continue, and the rapid pace of monetary tightening is yet another reason to expect growth to slow.
- If inflation does not fall as expected the Fed’s plan to raise rates to only moderately above neutral will be at risk —and every rate hike increases the odds of a hard landing.
- Commodity prices pose two-sided risks. Falling gasoline prices were a welcome relief over the summer, but geopolitics remain uncertain, and prices could go either up or down from here.
China’s economic growth has rebounded in the third quarter after a significant contraction in the second, but the magnitude of the rebound has been weaker than expected so far.
This is primarily because of slower recovery in private demand due to multiple shocks, including the resurgence of COVID-19, hot weather, suspension of mortgage payments and power shortages.
One key difference from the post-COVID rebound in 2020 (when the housing recovery was synchronized with other drivers) was that housing investment didn’t rebound following the April shock, but continued to weaken significantly.
Private investment recovery in the manufacturing sector has also been weaker.
On the other hand, government-supported investment, like infrastructure investment and high-end manufacturing, has been strong and accelerating in recent months.
This tug of war between still-sluggish private demand and stronger public demand has been driving growth dynamics in recent months.
- Therefore, to achieve sustainable recovery, it’s important for the government to support private demand so far as possible, and especially to stabilize housing activity. In the meantime, continued strong fiscal support is also much needed.
- Material uncertainty remains around COVID-19 developments, although our baseline assumes no more outbreaks like Shanghai’s and less draconian local restrictions.
- Slower and/or weaker than expected recovery in housing activity—if sentiment around the sector doesn’t improve or even gets worse – could pose downside risks for growth.
Euro Area Economy
Alliance Bernstein expects the euro-area economy to slide into recession in the coming quarters.
Real incomes are falling in the face of a massive natural gas price shock that is pushing inflation to unacceptable levels.
The risk of fuel rationing as winter approaches is very real and would make an already unpleasant outlook even worse. There are no good options for the European Central Bank (ECB).
High inflation has been largely commodity-based but is now developing into a broader phenomenon, and this is forcing higher policy rates just as the growth outlook deteriorates.
The ECB has no choice: its inflation-fighting mandate dictates that it continues with higher rates, though we expect that the central bank will reverse course sooner than most peers in 2023.
Fiscal policy will likely do what it can to ease pain on households. Always Alliance Bernstein hopes that means targeting support programs that keep houses warm and businesses open in the winter.
Global Macro Outlook
The near-term picture suggests that inflation will remain elevated.
In the US, core inflation (excluding energy and food) is set to outpace headline inflation, driven largely by increasing shelter costs. We believe that the roughly 20% rise in home prices over the last year has yet to be fully felt in the inflation data.
In the 2007/2008 cycle it wasn’t until 15 months after home prices peaked that shelter inflation began to move lower.
If that experience repeats in this cycle, it won’t be until next summer before shelter inflation moves lower, and shelter is the largest category within the inflation basket.
The labor market remains strong as well, and that should keep services prices elevated.
Alliance Bernstein expects price pressure from services to be sufficient to keep overall core inflation elevated even though goods prices are decelerating as global supply chains reboot and energy prices decline.
What if the Banking Crisis Is Not Over?
“Moody’s assume the worst of the crisis is over, and while the fallout on credit and economic growth will be meaningful, it will not be enough to tip the economy into a recession.”
“But what if the banking crisis is not over?”
THERE ARE TWO ALTERNATIVE SCENARIOS
- “The first assumes that the current calm in the financial system is brief. There are more bank failures, and depositors quickly lose faith that they will be made whole by the government and the deposit runs restart.”
“The banking system significantly tightens its underwriting standards and restricts credit to households and businesses.”
- “In the second scenario, Moody’s assume that the crisis abates for a while, but inflation remains persistent, forcing the Federal Reserve to continue raising interest rates, resulting in more losses on banks’ security holdings, prompting more failures and bank runs late this year and early next.”
“Both scenarios depend on policymakers mistakenly failing to immediately fully backstop the banking system.”
Join the conversation with your own take on these topics in the comments below.
About the Author
Alessandro is a Financial Markets enthusiastic and he loves learning from articles/papers on many financial topics.
In doing so he shares with you the most interesting charts and comments.