(The author is Editor-at-Large, Finance and Markets at Businesshala News. Any views expressed here are her own)
LONDON, Nov 10 (Businesshala) – If an investor tells you they’re sure what happens next in macro markets, they’re likely to fall.
There is such confusion in policy and investment circles right now over inflation, output, jobs, financial prices and central bank policy that it is impossible to predict with any confidence the next 3-6 months.
Ironically, there appears to be very little uncertainty over the long-term horizon – where the risk premium has traditionally been far higher as more things may go bump into the night.
But it may be easier for forecasters to look beyond supply constraints and labor market distortions related to the unprecedented pandemic, than to navigate a still-northern winter of wildly disparate economic data and policy panic.
After eye-watering swings in short-term interest rates over the past few weeks – fueled by bad moves by the world’s top central banks – market confidence about the next few months remains low.
Again this week, ING’s Rob Carnell called a ‘cacophony’ of central bank speeches that “messy and directionless” the big picture for markets and did little to encourage divergence and volatility ideas. Is.
Adding to the complexity, Federal Reserve Chairman Jerome Powell stressed that the Fed is looking closely at labor market inequalities, rather than just headline numbers, in estimating maximum employment.
But his colleagues still sing from very different hymns. On Monday alone, Fed Vice President Richard Clarida said the terms for raising interest rates could only be as late as 2022; St. Louis Fed chief James Bullard agreed with the markets that there would be two rate hikes by then; But Chicago Fed boss Charles Evans doesn’t expect one until 2023.
It also believes that investors can gauge the Fed’s mood by who is in the hot seat at the moment. They still do not know whether Powell will be re-appointed as chairman when his term ends in February. And this week’s decision by top bank supervisor Randall Quarles to resign next month is leaving at least two vacant seats on the board at the end of the year.
Although faced with similar inflation and jobs problems, the Fed’s foreign counterparts appear to be on an equally different path.
European Central Bank officials have pushed back against market pricing for a smaller ECB rate hike next year, and chief economist Philip Lane alleged again this week that pushing for higher rates next year could backfire.
And yet ECB board member Isabel Schnabel said the bank could not ignore rising home prices, while bank supervisor Andrea Enria insisted that low interest rates were hurting bank margins, as they could reduce the amount of lending. are increasing.
Confidence in Bank of England chief Andrew Bailey’s speech, meanwhile, was hidden beneath the waterline last week, when he spent a month tricking markets into thinking a UK rate hike was possible and again at last Thursday’s meeting. Voted against one. Pointing to still high rates, he also stresses that tight credit does nothing to address supply-distorting inflation spikes.
Returning to the fundamental model of where interest rates should end at the end of the cycle – so-called terminal rates – provides some anchorage for the bond and money markets.
But also pre-believe that this centrally governed global slowdown and bounce-back of the past 18 months is like any other cycle we have seen.
And for many, there is no longer any consensus on how we get from here to there.
This week a JPMorgan survey of its clients asked whether markets or central banks were correct in their interest rate expectations for the coming year. The answer was split 50-50 – just like many other questions put it on equity or bond positioning.
And it’s not just a question of clarity.
Some envy the enigma of central banks. Grow too quickly and run the risk of shutting down recovery before they mature; Jump the gun on other countries and you risk rising currency that amplifies the hit; Or just do nothing and risk putting inflation at risk.
Mark Nash in Jupiter’s Fixed Income Alternatives thinks the Fed is in an “incredible position” and has to “choose between economic price stability and equity price stability.”
The dilemma is compounded by the financial stability arm of central banks, who warned once again this week that persistent easy money threatened to blow bubbles in everything from equities to crypto tokens and meme stocks.
What are investors to do? It appears that many people remain only long equities, buying inflation-protected bonds and keeping fingers crossed.
The seemingly endless sinking of inflation-protected government bond yields to the deepest ever record below zero shows just that. Inflation-linked bond yields are now below -1.1% in the United States, below -2.0% in Germany and below -3.2% in the UK.
Franklin Templeton’s fixed-income CIO Sonal Desai thinks it will ultimately come down to the post-pandemic labor supply and how quickly job-seekers can prevent temporary inflation spikes from halting the wage-price spiral. But she admits that it may take a lot longer than the patience of the markets to assess this.
“For now, however, investors had better prepared for sluggish labor supply, persistent inflation and rising financial instability.”