Peak in the clouds
- 19 September 2022 (5 min read)
Key points:
- The US inflation peak remains elusive, calling for another jumbo Fed hike this week (we expect 75 bps)
- We discuss Maurice Obstfeld’s call for a more internationally coordinated monetary policy
- The reaction of G. Meloni to the EU/Hungary spat needs to be watched carefully
The US inflation peak remains elusive. While the “exogenous factors” of inflation continue to abate – US import prices excluding oil are now growing by less than core consumer prices – domestic pressure continues to accumulate. The softening of the US labour market which had emerged in late spring has given way to impressive resilience. The decline in long-term inflation expectations should bring some comfort to the Fed, suggesting the central bank has regained its full credibility, but their research suggests that the still-elevated short-term expectations matter more for wage and price dynamics. All this calls for another jumbo hike this week. Some observers are now calling for 100 bps. It may well be an option, but even with a 75-basis points hike – our baseline – the policy stance will reach restrictive territory. This should call for a modicum of prudence.
The accumulation of oversized hikes creates the impression of “race to the peak” across central banks. Maurice Obstfeld’s called for a more internationally coordinated monetary policy, to reduce the risk of excessive tightening. We agree in principle but in practice, such coordination would be truly efficient only if exchange rate management was part of the package. Even in a coordinated approach, the respective quantum of tightening would likely depend on the position of each economy in the cycle. Given the US overheating, in contrast with the Euro area, a significant rate differential would remain between the two currencies. The ensuing weakness in the euro, fuelling imported inflation, would still tempt the ECB into “hiking too much”, jeopardizing any internationally pre-agreed pace of tightening. We are not holding our breath on the chance to see such grand bargain emerge any time soon.
Finally, we look into the EU Commission’s recommendation to suspend part of the structural funds to Hungary. The reaction of the likely winner of the Italian elections this week casts a light on the possibility to see Rome aligning more with the “combative” Eastern member states. This won’t help the Union make further progress.
Disclaimer
This website is published by AXA Investment Managers Asia Limited (“AXA IM HK”), an entity licensed by the Securities and Futures Commission of Hong Kong (“SFC”), for general circulation and informational purposes only. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy, sell or enter into any transactions in respect of any investments, products or services, and should not be considered as solicitation or investment, legal, tax or any other advice, a recommendation for an investment strategy or a personalised recommendation to buy or sell securities under any applicable law or regulation. It has been prepared without taking into account the specific personal circumstances, investment objectives, financial situation, investment knowledge or particular needs of any particular person and may be subject to change at any time without notice. Offering may be made only on the basis of the information disclosed in the relevant offering documents. Please consult independent financial or other professional advisers if you are unsure about any information contained herein.
Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee such opinions, estimates and forecasts made will come to pass. Actual results of operations and achievements may differ materially. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Information herein may be obtained from sources believed to be reliable. AXA IM HK has reasonable belief that such information is accurate, complete and up-to-date. To the maximum extent permitted by law, AXA IM HK, its affiliates, directors, officers or employees take no responsibility for the data provided by third party, including the accuracy of such data. This material does not contain sufficient information to support an investment decision. References to companies (if any) are for illustrative purposes only and should not be viewed as investment recommendations or solicitations.
All investment involves risk, including the loss of capital. The value of investments and the income from them can fluctuate and that past performance is no guarantee of future returns, investors may not get back the amount originally invested. Investors should not make any investment decision based on this material alone.
Some of the services listed on this Website may not be available for offer to retail investors.
This Website has not been reviewed by the SFC. © 2023 AXA Investment Managers. All rights reserved.