[Economics] Investors fear the "devastating effect" on the economy of the rate hikes defended by central banks

[#Wittels-]

 

They warn that the increases can lead to stagflation or, even worse, a new recession due to their impact on growth

A 'trader' following the stock market session on Wall Street.

 

A senior official from the European Central Bank (ECB) commented privately a few days ago that one thing is what the markets want, because they are doing better for their objectives, and another thing is what he believes the ECB itself has to do. I was saying this in connection with the imminent rate hike (their amount and speed), and the truth is that the interests of both parties may not coincide, but they are closely related and in recent days, investors are showing signs of their concern that this rise will lead to stagflation or, even worse, to a new recession.

It happens in Europe and also in the United States, where the appearance of Jerome Powell in the Senate yesterday focused the attention of those investors. The markets move these days between the doubt that the regulators have arrived late to the monetary normalization process and the fear that the rate movements will take time to control inflation and exacerbate the slowdown in the economy. Other topics, even, that go too far. "The sheer number of actions by central banks in the past week has shown that many are growing in ignorance of the devastating effect this will have on growth. This dynamic poses serious risks to the world and we now estimate that the revival of economic activity in The US will stagnate in the coming quarters," notes BlackRock, the largest global asset management firm, in its weekly research commentary. "The focus is on the Fed and we think it will eventually change course, but not before stalling growth. This raises the specter of weak growth against a backdrop of persistent inflation," he adds.

 

His message aligns with that of other investors, analysts and management firms trying to gauge the recession risks they face in the midst of the fight against inflation. The Federal Reserve raised interest rates a further 0.75% last Wednesday (the biggest move since 1994), leading a round of hikes by central banks around the world, including the Swiss National Bank (+0.5% ) or the Bank of England, which rose another 0.25% in the same week.

In the Eurozone, the ECB announced at its last meeting that in July it will carry out the first rate hike in 11 years. In his case, the path of increases will also be marked by the impact that the new monetary policy will have on sovereign debt and the risk premiums of peripheral countries. The so-called fragmentation has become one of the main concerns of the Eurobank, as acknowledged yesterday by the entity's vice president, Luis de Guindos, when speaking of the "undesired fragmentation" that threatens the region.

During his speech at the summer course organized by the Association of Economic Information Journalists (APIE) at the Menéndez Pelayo International University (UIMP), De Guindos emphasized the importance of developing anti-fragmentation instruments to "fight against the increase in risk premiums unwanted" and to deal with price increases. "Having an anti-fragmentation instrument is freeing up monetary policy to be able to act more forcefully against inflation," Guindos pointed out, specifying that this does not mean, however, that rate hikes are going to speed up or gain in intensity, since any The central bank's decision will be "data dependent".

 

RISKS
In a macroeconomic context also marked by the war in Ukraine and the effects of the pandemic, the ECB works with two hypothetical scenarios: on the one hand, a real scenario in which "growth projections are positive" and, on the other hand, an alternative scenario, "more adverse" in which more negative hypotheses are contemplated.

“The longer the inflation spike and central bank interest rate hikes last, the greater the risk of a recession,” says Ben Laidler, Global Markets Strategist at eToro, addressing the re or no dilemma.

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For Jan Viebig, global CIO of the investment firm ODDO BHF, "the markets must prepare for a slowdown in growth with high inflation." Both in the US and in Europe, the latest inflation figures are above 8% and that raises the risks. "The likelihood that the US will experience a recession in the next 12 months has been highlighted recently; in Europe, the economy is cooling more markedly and a recession would be inevitable if a Russian gas embargo were imposed or if Russia cut off supply" .

Tina Fong, a strategist at Schroders, has gone further by analyzing more than 100 years of data to try to predict what these weeks' market movements might indicate for the economy. Among his conclusions, he points out that "although we do not currently foresee a recession in the US, the risks are tilted towards one. Recessions do not follow a bear market, although the odds are not favorable if you look at history," he explains. The S&P 500 index on Wall Street entered bearish territory several sessions ago, hence its appreciation.

 

Link: https://www.elmundo.es/economia/macroeconomia/2022/06/23/62b302d6e4d4d80f708b45cb.html