At the latest edition of Market Week in Review, Olga Bezrokov, Equity Portfolio Manager, and Sophie Antal-Gilbert, Head of AIS Portfolio & Business Consulting, discussed the latest economic data releases and how central banks react to numbers. they seek to control inflation. They also discussed the timing of a possible US recession.
PMI surveys disappoint as closely watched US inflation gauge slows
Diving into the data looking at recent Purchasing Managers’ Index (PMI) surveys in the United States and the euro zone, Bezrokov said the latest numbers were lower than expected, but were still above a reading of 50 – the dividing line between expansion and contraction. “This deceleration was not too surprising,” she noted, “as the latest actions by central banks were taken explicitly with the aim of cooling an overheated economy in order to rein in inflationary pressures.”
Regarding the housing market, Bezrokov noted that US housing starts and sales of new and existing homes missed expectations in April. “This reflects declining levels of affordability among potential buyers, who have been effectively shut out of the market by high housing costs and sharply rising mortgage rates,” she explained.
On the inflation front, Bezrokov said the U.S. personal consumption expenditure (PCE) price index for April — the Federal Reserve’s (Fed) favorite inflation gauge — rose to an annual rate of 6.3%. While the increase was a bit higher than expected, it was mostly lower than March’s 6.6% increase, which marks the index’s first deceleration this year, Bezrokov said.
“Potentially, this could be an indication that the actions the Fed has taken so far to fight inflation, as well as the central bank’s communication around future actions, may be starting to have the desired effects,” he said. she points out.
Overall, Bezrokov said the main conclusion from all the data is that the global economic expansion is continuing, but with growth decelerating from a very high rate. In addition, US inflation appears to have come off its recent highs, but remains more rigid than expected, she added.
ECB unveils July rate hike plan
Gilbert asked Bezrokov how central banks around the world are reacting to recent economic data releases, amid a global push to extinguish inflation. Bezrokov said most global central banks are considering further rate hikes this year to restore price stability. This includes the Reserve Bank of New Zealand, she said, noting that the central bank raised its benchmark rate by 50 basis points (bps) on May 25 and indicated that many more rate hikes are likely. on the road.
Meanwhile, European Central Bank (ECB) President Christine Lagarde recently revealed that authorities are likely to raise rates by 25 basis points in July and September, Bezrokov noted. “This would allow the ECB to lift interest rates into positive territory by the end of the third quarter,” she said, noting that the central bank’s cash rate currently sits at -0, 5%.
Turning to the United States, Bezrokov said the May 3-4 Fed meeting minutes show most central bank officials consider 50 basis point rate hikes appropriate in the next two months. meetings, scheduled for mid-June and late July. “The minutes showed that the members of the Federal Open Market Committee are very concerned about the difficulties caused by high inflation, as well as its persistence – and that they believe that aggressive actions are necessary to control the price pressures,” she said. Fed officials also flagged other concerns at the meeting, including risks to commodity markets from the war in Ukraine, she added.
The minutes of the meeting also revealed the impacts the Fed anticipates from this year’s rate hikes, as well as the way forward for monetary policy, Bezrokov noted. “Central bank officials saw the potential need to raise the policy rate into restrictive territory to significantly slow the economy, particularly on the demand side, to contain inflation,” he said. she declared. At present, the Fed believes that monetary conditions remain accommodative, with the cash rate below neutral – and that’s not where the US central bank wants to be, given inflation risks. , Bezrokov said.
Aggressive rate hikes expected at the next two Fed meetings would allow the central bank to quickly slow the economy, potentially providing an opportunity for a pause in the rate hike cycle later to assess the economic developments, she noted. However, Bezrokov stressed that it is still too early to expect a pause in the cycle now, especially in light of ongoing high inflation.
Our recession risk assessment
Bezrokov and Gilbert concluded the segment by examining the potential risks of recession in the United States. Bezrokov stressed that a recession is not a short-term concern, but noted that it could become one eventually if the Fed continues on its planned aggressive course of raising rates.
“The deceleration we’re seeing in the latest economic data is intentional, and the Fed has been very clear that its number one goal right now is to slow the economy in order to extinguish inflation…Nopeyou to avoid a recession,” Bezrokov explained. That being said, however, recession risks are not today’s issue, she concluded.
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