Inflation Persists, but the Economy Is Resilient – Investors Face Total Uncertainty.
This explains why you can read such different opinions for the coming months.
When you ask economists what risks they anticipate for the coming months, you will see that two topics stand out most frequently: recession and inflation. While we are not seeing a sharp deceleration in the economy, the second of these issues seems to us to be very sensitive today.
In addition to commodity inflation, which is largely correlated to developments in the Ukraine conflict - but which could soon benefit from the fall in prices from their highs - wage inflation represents a more significant danger.
After a few months’ pause, wages are rising again in the United States, in the context of full employment and increased employee mobility. In Europe, this movement is less visible but is nevertheless tending towards a similar trend, as employees' demands are becoming more and more pronounced (UK, Germany). A wage-price spiral, generating more structural inflation, seems to have been set up in the United States and may soon be active in Europe.
The Fed, the ECB, and the other major central banks, therefore, have no alternative but to act vigorously to try to stop this new spiral, even if the 2% inflation target in the short term seems illusory anyway.
Rate hikes will continue at a steady pace, even if it means impacting economic growth. This is all the more likely since, to date, the growth base remains solid in the eyes of these institutions, and global activity benefits from several effective drivers.
In the US, future growth is based on several assumptions:
A backlog of consumption, particularly for goods that are currently in short supply due to the supply crisis (e.g., automobiles).
A low level of inventories, which should be replenished.
The resumption of drilling for fossil fuels.
Armament spending.
Corporate self-financing.
These factors should protect the U.S. economy from a major setback, even if a slowdown seems inevitable given the Fed's current monetary policy.
In Europe, growth is also holding up well, with France leading the way and Germany suffering from its dependence on the automotive market. However, Europe may suffer more due to its lack of energy self-sufficiency, and general morale which has been badly affected by the conflict on its doorstep. These prospects are likely to encourage the European Central Bank to moderate its action, even if several rate hikes are already in the pipeline.
China is in a completely different situation. We are seeing a rapid economic recovery after the various confinements that have affected the country. The People's Bank of China is supporting this recovery with rate cuts and monetary injections. This clear desire to revive the economic machine is good news for global growth.
This autumn is therefore marked by uncertainty and concern among economic players.
The financial markets have been erratic this summer, with a sharp drop in the indices in June 2022, a strong recovery in July 2022, reflecting the unbearable lightness of the markets in the summer, and a partial relapse in August 2022. The rise in interest rates, especially if it is not anticipated, can lead to significant declines in risky assets.
Conversely, any lull on the inflation front could lead to a sudden market rally, barring a sudden and unexpected deterioration in the economy. Despite rather attractive stock prices and generally satisfactory corporate results, it seems advisable to remain cautious in the short term.
Some reading
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On Wall Street, Whistleblowers Will Be Able to Be Paid Even More by the SEC. The SEC just ended restrictions dating back to the Donald Trump era.
Putin’s 5 Major Geopolitical Mistakes With His War in Ukraine. Mistakes that will lead Putin to his downfall once the war in Ukraine is lost by Russia.
4 Billion People by 2100 — The World’s Population Could Be Cut in Half by the End of the Century. This is at least the thesis supported by James Pomeroy, an economist at HSBC.
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