The Inflation Wall Is Too High – Can Interest Rates “Increase Lower”?
Rates already seem to be capitulating, even though the escalation had barely begun.
The central bankers have tried. But no! Interest rates came back down, after trying to rise a bit. Inflation seemed out of reach. Too high, too late ...
And after all, why do it? Inflation is so far away now: “there's no point in sowing in the sand”, said the investors, like Alain the lucid philosopher. In the United States, in Eue, and in France in particular: the 10-year government bonds first rose from 0% to nearly 2.5% from January to mid-June 2022, before falling back to 1.7% today.
Grotesque or exuberant, you choose.
In market terms, this means that investors initially anticipated aggressive interest rate hikes by central banks, led by the Fed and ECB. Then it was all over.
Today, the markets are still anticipating rate hikes for 2022, but almost 0.5% less than what was expected just a few weeks ago. According to the far-sighted finance industry, US policy rates are expected to rise from 1.75% to 3%, compared to the 3.5% expected a few weeks ago. The European Central Bank deposit rates are expected to rise from -0.5 to 0.5%, compared to the 1% expected only a few days ago.
The relapse has 3 possible causes, from the most twisted to the most admissible.
1. The inflation wall was too high
“It is at the foot of the wall that necessity makes virtue”, is beautiful, but it is false.
The rates were also at the foot of the wall of inflation, but the wall was too high. After a few attempts, rates capitulated. They finally pulled over to the side, like an athlete running out of competition, running out of steam after a few accelerations. It is quite possible that this defeat of rates can be explained by the abuse of doping products over the years. These are the so-called unconventional monetary policies, a kind of EPO that was administered to uninspired investors.
Condemned to the intoxication of low rates, the investor would now be unfit for a bond crash. Worse than letting go, the investor gives up the fight against inflation. He acts as if he did not know: “what you do not know cannot distress you”, says the investor who has read Epicurus.
2. Crazy logic
The investor is fond of reasoning, he always finds one to make sense of his choices, and another to justify his choices of the old. But there is a problem: the investor does not distinguish between rigorous and faulty reasoning. And it seems that we are on the wrong side since the beginning of the year.
How do you justify rates that soar and then crash? There is nothing like a messy use of transitivity of implication to make you believe any nonsense:
Every rate hike causes a recession.
Any recession causes a fall in rates.
So any rise in rates causes a fall in rates.
Yesterday's fall in rates is therefore the consequence of the rise in rates the day before yesterday. Now we are clear.
3. The well-bred market economist's explanation
In no particular order, the following flashes are noted:
“Stubborn inflation will eventually force central banks to throw the baby out with the bathwater ... I mean break growth if that is the price of breaking inflation.
Anyway, the damage is done. Purchasing power has already shifted to fallen power... watch consumer confidence plummet, business confidence tremble.
With or without the tightening of monetary policy, economic growth is likely to slow seriously at best, probably into negative territory.”
This not-so-cheerful reading of the economic news can help understand the exuberance of rates.
First, it was fears of a race to the bottom by central banks behind hysterical inflation that triggered the pressure on rates. Then came the time of the spoiled cherries, those announcing that the remedy of restrictive monetary policies would be worse than the evil. And so rates began to fall again.
This third explanation is probably the most elegant one to justify the spectacular trajectory of rates. The language used is well understood by the so-called insiders. A probably more elegant explanation, but certainly as dubious as the other two explanations.
In the end, the layman will be allowed to tick a little. He may even allow himself to think that such rate movements are a bit disturbing, a polite term to mean something else.
Some reading
The Trial Between Twitter and Elon Musk Will Take Place in Delaware — The Founder of Tesla Risks Big. The Delaware Court of Chancery could force Elon Musk to buy Twitter for $44 billion.
Stagflation, Debt Crisis, and a 50% Crash on Wall Street Await Us According to Nouriel Roubini. Dr. Doom is more than pessimistic about the coming months.
A Stock Market Rally Is Still Possible for the End of 2022 if These 5 Things Go Well. All it would take is for one of the five to go in the right direction to have a snowball effect afterward.
The Lessons of the First Oil Shock From Paul McCracken OECD’s Report Should Inspire Current Leaders. “History never repeats itself, but it does often rhyme.”