Vladimir Legaspi on LinkedIn: Interesting perspective from our Chief Economist. (2024)

The objective of central banks is clear; inflation is too high, and therefore, economic growth must be significantly reduced to combat this. Unemployment must rise, and capacity utilization must decrease, until wage increases and inflation are back in line. However, the question remains: how far and for how long should this policy be pursued to achieve the desired goal? Interestingly, the bond market has not been overly concerned, they think it's just a matter of time before central banks achieve their objectives, accompanied by much lower interest rates. Consequently, longer-term interest rates have been declining recently. Subsequently, equity investors became enthusiastic. They observe a significant decline in inflation already, suggesting that central banks will achieve their goals without a recession. However, two caveats should be considered: 1) As interest rates fall and stock prices (and housing prices) rise, the economy is stimulated again. Does this mean that wage increases and inflation will continue to decline? 2) What will the economies look like once inflation is successfully brought under control? Regarding the first point, we believe that recent reactions may have been overly optimistic. We think that persistently high interest rates are needed to effectively control inflation. Although we saw a rapid deterioration in growth figures from Europe and the US, there has been some recent recovery. This suggests that longer-term interest rates are unlikely to decline much further, or they may even rise. This is not favorable for stocks, as companies will face challenges in a low-growth environment with tight labor markets. Moreover, with persistently high interest rates, the risk of a recession in a few quarters is increased. Concerning the second point, the West is facing a period of significantly declining labor market supply due to demographic developments, coupled with a slow increase in productivity. The latter is hindered by a lack of investment, and it may take years before various applications of Artificial Intelligence lead to a much higher productivity increase for the entire economy. Furthermore, the global economic climate has shifted from deflationary to inflationary due to deglobalization and tight labor markets. This trend may even intensify if energy prices rise. In conclusion, in our opinion, this leads to relatively low growth, high government deficits, no truly low interest rates, and much more challenging conditions for corporate profits. Given the elevated total debt/GDP ratios, it is also very well possible that, in these conditions, inflationary policies will be pursued.PS: Never miss an update? Receive my thoughts of the week for free by email; send a DM with your email address and we put you on the list.Wishing you a pleasant week ahead.Kind regards,Eddy

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The Financial Times (FT) reported that central banks around the world are entering a "painful" new phase in their battle against inflation. Economists warn that the price of reaching the 2% target will be a recession.Headline inflation has fallen sharply in most countries since last fall, but core inflation remains at or near multi-year highs, raising concerns that central banks will struggle to hit their inflation targets without slipping into recession.The problem of the Bank of England is particularly severe; as the UK's core inflation rate hit 7.1% in May, it raised interest rates by 2 yards in one fell swoop on the 22nd.The U.S. personal consumption expenditures (PCE) core deflator rose 5.3% year-on-year in April, and the core inflation rate in the euro zone also stuck around 5%, so the U.S. and European central banks took less action last week. The European Central Bank (ECB) raised interest rates by 1 yard, and the U.S. Federal Reserve (Fed) did not raise interest rates. However, both central banks emphasized that inflation has not been defeated and hinted that further interest rate hikes will be forthcoming."It will be more difficult for inflation to fall sharply again; there will be more pain to bear, including a possible recession in the second half of the year," said Ricardo Donner, chief U.S. economist at BNP Paribas."The only way to get inflation down to 2% is to compress demand and slow down economic activity significantly," said Shlok, chief economist at Apollo Global Management.Bundesbank President Nagel warned that inflation is an "extremely greedy monster" and that stopping interest rate hikes would be "mistake number one".At present, the market expects the peak rate of this year to be 5.25-5.5%, which is 1 yard higher than the forecast at the beginning of the month; investors also expect the ECB to raise interest rates by 1 yard each in July and September.But some traders still questioned the central bank's resolve. A survey of 81 bond market managers by Bank of America (BofA) showed that 60% of respondents believe that central banks will accept inflation rates of 2-3% to avoid recession, and only slightly more than 25% of respondents believe that Interviewees believe that the central bank will not hesitate to trigger a recession in order to lower the inflation rate.Some economists believe that the rate of internal inflation will also fall soon. Warburg, an economist at Generali Insurance Company of Italy, said that for the situation in the euro zone, the increase in producer prices is almost zero, which will reduce core inflation.

The Financial Times (FT) reported that central banks around the world are entering a "painful" new phase in their battle against inflation. Economists warn that the price of reaching the 2% target will be a recession.Headline inflation has fallen sharply in most countries since last fall, but core inflation remains at or near multi-year highs, raising concerns that central banks will struggle to hit their inflation targets without slipping into recession.The problem of the Bank of England is particularly severe; as the UK's core inflation rate hit 7.1% in May, it raised interest rates by 2 yards in one fell swoop on the 22nd.The U.S. personal consumption expenditures (PCE) core deflator rose 5.3% year-on-year in April, and the core inflation rate in the euro zone also stuck around 5%, so the U.S. and European central banks took less action last week. The European Central Bank (ECB) raised interest rates by 1 yard, and the U.S. Federal Reserve (Fed) did not raise interest rates. However, both central banks emphasized that inflation has not been defeated and hinted that further interest rate hikes will be forthcoming."It will be more difficult for inflation to fall sharply again; there will be more pain to bear, including a possible recession in the second half of the year," said Ricardo Donner, chief U.S. economist at BNP Paribas."The only way to get inflation down to 2% is to compress demand and slow down economic activity significantly," said Shlok, chief economist at Apollo Global Management.Bundesbank President Nagel warned that inflation is an "extremely greedy monster" and that stopping interest rate hikes would be "mistake number one".At present, the market expects the peak rate of this year to be 5.25-5.5%, which is 1 yard higher than the forecast at the beginning of the month; investors also expect the ECB to raise interest rates by 1 yard each in July and September.But some traders still questioned the central bank's resolve. A survey of 81 bond market managers by Bank of America (BofA) showed that 60% of respondents believe that central banks will accept inflation rates of 2-3% to avoid recession, and only slightly more than 25% of respondents believe that Interviewees believe that the central bank will not hesitate to trigger a recession in order to lower the inflation rate.Some economists believe that the rate of internal inflation will also fall soon. Warburg, an economist at Generali Insurance Company of Italy, said that for the situation in the euro zone, the increase in producer prices is almost zero, which will reduce core inflation.

The last quarter was challenging for equity markets, with even large tech companies strugglingRising oil prices for much of the quarter presented a challenge for investorsWith inflation falling, eyes are now on central banks to see how much higher interest rates will moveFor much of the past year, the big economic story affecting markets has remained the same: inflation is too high, and central banks have been increasing interest rates to try and control it.

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Quarterly Market Update: Are we reaching peak interest rates?The last quarter was challenging for equity markets, with even large tech companies strugglingRising oil prices for much of the quarter presented a challenge for investorsWith inflation falling, eyes are now on central banks to see how much higher interest rates will moveFor much of the past year, the big economic story affecting markets has remained the same: inflation is too high, and central banks have been increasing interest rates to try and control it.

The Financial Times (FT) reported that central banks around the world are entering a "painful" new phase in their battle against inflation. Economists warn that the price of reaching the 2% target will be a recession.Headline inflation has fallen sharply in most countries since last fall, but core inflation remains at or near multi-year highs, raising concerns that central banks will struggle to hit their inflation targets without slipping into recession.The problem of the Bank of England is particularly severe; as the UK's core inflation rate hit 7.1% in May, it raised interest rates by 2 yards in one fell swoop on the 22nd.The U.S. personal consumption expenditures (PCE) core deflator rose 5.3% year-on-year in April, and the core inflation rate in the euro zone also stuck around 5%, so the U.S. and European central banks took less action last week. The European Central Bank (ECB) raised interest rates by 1 yard, and the U.S. Federal Reserve (Fed) did not raise interest rates. However, both central banks emphasized that inflation has not been defeated and hinted that further interest rate hikes will be forthcoming."It will be more difficult for inflation to fall sharply again; there will be more pain to bear, including a possible recession in the second half of the year," said Ricardo Donner, chief U.S. economist at BNP Paribas."The only way to get inflation down to 2% is to compress demand and slow down economic activity significantly," said Shlok, chief economist at Apollo Global Management.Bundesbank President Nagel warned that inflation is an "extremely greedy monster" and that stopping interest rate hikes would be "mistake number one".At present, the market expects the peak rate of this year to be 5.25-5.5%, which is 1 yard higher than the forecast at the beginning of the month; investors also expect the ECB to raise interest rates by 1 yard each in July and September.But some traders still questioned the central bank's resolve. A survey of 81 bond market managers by Bank of America (BofA) showed that 60% of respondents believe that central banks will accept inflation rates of 2-3% to avoid recession, and only slightly more than 25% of respondents believe that Interviewees believe that the central bank will not hesitate to trigger a recession in order to lower the inflation rate.Some economists believe that the rate of internal inflation will also fall soon. Warburg, an economist at Generali Insurance Company of Italy, said that for the situation in the euro zone, the increase in producer prices is almost zero, which will reduce core inflation.

For much of the past year, the big economic story affecting markets has remained the same: inflation is too high, and central banks have been increasing interest rates to try and control it.Traditionally, raising interest rates brings down inflation by slowing spending. Higher interest rates make it more expensive to borrow, which can encourage saving and slow down company investments. With the economy slowing, the theory goes, inflationary pressure should naturally ease. The trade-off is that if the economy slows by too much, Central Banks could push an economy into a recession.#inflation #interestrates #marketupdate

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A review of the 3rd quarter of 2023:The last quarter was challenging for equity markets, with even large tech companies strugglingRising oil prices for much of the quarter presented a challenge for investorsWith inflation falling, eyes are now on central banks to see how much higher interest rates will move