No pivot for Christmas

The rate hikes of 0.50%, first from the Fed and then from the European Central Bank (ECB), represent a change in pace but not direction and were widely anticipated by markets. They mark a change in pace because both central banks moved from hikes of 0.75% in concert. On the other hand, their stance remains identical – restrictive, with the scenario of a pivot on the horizon within a few months excluded. It is still too early to claim victory in the fight against inflation and therefore premature to anticipate any change in the restrictive stance.

In Washington, it was not the decision to increase rates but Fed members’ rate expectations over a one-year horizon that took the markets by surprise. The governors now expect rates to rise to 5.2% on average, which is 0.60% higher than the level forecast in September this year. Although they cannot yet claim a victory over inflation, we are starting to see the first positive signs: after a high of 9.1% in June, consumer prices “only” rose by 7.1% year-on-year in November. The labour market is certainly still tight and likely to fuel inflation in the coming months. However, encouraging signs are starting to emerge with falls in the price of goods, real estate and commodities. The areas responsible for the initial surge in inflation are gradually settling down, justifying the end to rate hikes of 0.75%, which was the case after the last four meetings.

In Frankfurt, ECB President Christine Lagarde dampened any hopes that markets may have had of a swift end to restrictive measures. The ECB announced it would start to reduce its balance sheet from March 2023 by EUR 15 billion per month. However, it also painted a grim picture of the need to remain firm in the face of inflation: “We have longer to go, and we are in for a long game”, stated Christine Lagarde, hinting at another two 0.50% hikes for next February and March. Government measures introduced to protect against energy inflation took a bruising in an aside, categorised as “counterproductive” and “dangerous” for already fragile public sector accounts.

The ECB press conference thus put a dampener on investors’ hopes of a pivot from the two most powerful central banks. The Euro Stoxx closed down 3.95% on 15 December – the biggest daily fall in five months.

As central bankers are giving no ground in their fight against inflation, there is little point in wishing for a pivot under the Christmas tree.

Final version of 16 December 2022 – Clément Inbona, Fund Manager

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