It's starting
- 27 June 2022 (7 min read)
Key Points
- Cracks appearing in the resilience of the economy – precisely when central banks were getting impatient
- We revisit our macro scenarios at mid-year.
The economy’s impressive resilience so far across the Atlantic has been a key ingredient in the central banks’ willingness to toughen up their stance to fight the inflation spike. If the usual “self-stabilizing forces” – e.g., a deceleration in consumption brought about by rising prices – do not show up, then the Fed and the ECB feel even more the need to bring forward their rate hikes. However, it is precisely at the moment this new resolve is communicated that signs of deceleration are appearing. The lower-than-expected PMI readings for June in both the US and the Euro area, together with a less concerning second estimate of US consumers’ inflation forecasts in the Michigan survey for June have triggered a – rare – downward revision in the market’s expectations for the Fed Funds trajectory. Besides, with no further Covid flare-up in China for now, the global economy may avoid another source of supply-side inflationary pressure through the price of manufactured goods. Finally, oil prices have moderated.
Key releases are coming out this week to gauge the speed of the correction in growth, but as we revisit at mid-year our forecasts, a painful but manageable landing is our baseline. We expect lower GDP growth in the US and the Euro area than the two central banks, but it’s precisely the reason why we think they won’t tighten as much as what they are communicating, which may offer some relief to the markets by the turn of the year. Still, we need to keep an eye on an alternative “persistent inflation” scenario which would force more monetary policy action. We don’t think it could take the same form across the Atlantic. In the US, inflation may be difficult to tame because wage growth remains too strong. The inflation drift would then come mainly from “core”, which would make the Fed’s job simple, albeit painful. In Europe, another exogenous shock such as a further sharp rise in gas prices – which have already moved up last week in reaction to Russia’s move on supply – is a more natural candidate. The ECB would probably continue hiking moderately to anchor inflation expectations, but we would expect some tension between governments and the central bank, while the probability to be forced to deploy an “anti-fragmentation” tool would be high – although the governments’ capacity to deliver on even light conditionality would be lower.
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.