Opinion | Before Christmas 2022, major central banks played the bogeyman. At least that’s how investors felt in light of the reactions seen in stock and bond markets after the US Federal Reserve (Fed) and European Central Bank (ECB) monetary policy meetings. However, the major hikes announced in mid-December were in line with expectations, ie by 50 bps instead of the 75 bps that characterized previous meetings. This slowdown in the pace of major interest rate hikes dovetails nicely with the latest version of the “pivot” definition widely celebrated by investors in October and November. by Nathalie Benattia, Senior Economist, BNPP AM
This article will not seek to interpret statements Jerome Powell Based on Christine Lagardefirst because many market economists paid attention to it in the hours after the meetings, and then because the basic meaning of the word (A linguistic, historical, or doctrinal interpretation of an ambiguous or debatable text According to the dictionary Larousse) This exercise can give an ironic touch.
behind the unanimous pronouncements extremist », predictions submitted by members Federal Open Market Committee (Federal Open Market Committee) In the United States and through the services of the Eurozone in the Eurozone, it seems to us, on the one hand, to provide much more information than usual, and on the other hand, to emphasize the elements to watch in 2023.
Compared to the figures published in September, central banks have revised their forecasts for core inflation in 2023 and 2024 upwards, while maintaining the assumption of a reversal in price increases. Their growth projections, downwardly revised, remain relatively optimistic even if the Fed expects a significant rise in the unemployment rate (which will stand at 4.6% by the end of 2023 and will remain at that level in 2024) and that European Central Bank An alternative scenario envisions the risk of a complete cessation of Russian gas deliveries.
Au-delà des risques qui pourraient modifier significativement la conjoncture, our central scenario for 2023 including a recession modérée aux Etats-Unis and dans the euro zone, for the differences in the proportions of the part and the Atlantic and with a dynamic specifique from every side. Although our forecasts are among our most cautious, the consensus of the economists surveyed is bloomberg It is converging towards this point of view, as indicated by the given probability of a recession in the next twelve months. Strong minds will point out that near-unanimity among economists does not guarantee…
Figure 1: Consensus touch
Central banks, with the notable exception of Bank of England, do not expect a contraction in activity next year and also point out that even a modest recession will not be sufficient to adequately reduce inflation. Let’s translate it: deteriorating economic indicators will not stop the rise in key interest rates. Another way of presenting things is to say that in the coming months, central banks will prioritize respecting their inflation target over all other considerations, in order to boost their credibility. In this regard, the emerging discussions about the possibility of adjusting (that is, increasing) these inflation targets do not seem to us to facilitate reflection.
Prior to this bout of inflation, the adjustments proposed by central banks were carried out in a context of very low inflation and were intended above all to confirm the pragmatic approach in force at the time. Changing the objective during a phase of high inflation would be tantamount to depriving one of this flexibility. Credibility at 2%, which is real, makes it possible to accept this with expectations of inflation in 2025 at 2.1% in the US and even at 2.3% in the eurozone, feed it and the European Central Bank Their mission can be considered accomplished. Conversely, if a new target is set at 3.0%, this level will become a de facto ceiling.
Despite the clear rhetoric of central banks, investors, because they expect inflation to fall so quickly in 2023, imagined that the increase in key rates would be less significant than announced ( final rateie the peak of the main interest rates l feed itis now much lower than it was before the release of the October CPI on November 10 which confirmed the decline in consumption) or that monetary easing will happen very quickly once this high point is reached.
It is easy to see what would drive such a scenario: the underlying effects on commodity prices are expected to be negative from the beginning of 2023, with the oil price change year-on-year at -30% in March assuming the price. Stabilization at the levels in force in mid-December (i.e. about $75 per barrel of crude oil). West Texas Intermediate).
There is no doubt that these developments have a rapid impact on commodity prices, but the real question for 2023 is the price of services, that is, wages. Forecasts European Central Bank Provide an answer to this question, explaining the notes in particular extremist During the press conference for Christine Lagarde And in the days that followed. According to Eurosystem services, wages should increase by 5.2% in 2023, 4.5% in 2024 and 3.9% in 2025, which is much higher than the historical average. In the United States, while wages are still rising at a rate of 5.0%, the feed it It explicitly seeks to “cool” the labor market.
Figure 2: Towards second-round effects?
Unfortunately for economists (and central bankers), employment is a lagging variable of activity, improving or deteriorating after other indicators have already seen a significant change. However, central banks make it clear that they want to create their monetary policy decisions On concrete data, not on expectations.
We expect, as indicated above, a recession and a reversal of inflation, which will remain high in 2023. Thus, we do not expect a decline in headline prices before 4e The quarter of 2023, from a relatively high final rate in the United States and the euro area. The trajectories reflected in the futures markets were very different at the time of the candymakers’ truce. The key component for bonds relative to equities in the first half of 2023 will be adjusting market expectations of central banks’ intentions, which will evolve according to available information. On the part of central banks, a reflection of Jerome Powell In a speech on inflation and the labor market he gave on November 30, we seem to sum up the general state of mind: “Without price stability, the economy doesn’t work for anyone.” On good terms…
Tribune by Nathalie Benattia, Chief Economist, BNPP AM
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