The US and European central banks raise interest rates and the continuation of the economic recession may be unavoidable
$NASDAQ 100 Index(.NDX.US$ Economic Observer reporter Liang Ji's inflationary pressure has not abated, and monetary tightening continues. The central banks of the US and Europe recently released the minutes of monetary policy meetings one after another, reaffirming that they will continue to tighten monetary policy to curb inflation.
On November 23, 2022, local time, the Federal Reserve released the minutes of the November interest rate meeting. It shows that the Federal Reserve will continue to raise interest rates, but the pace of rate hikes will slow down and begin considering policy changes after the recession. The market expects that the Federal Reserve will raise interest rates by 50 basis points (BP) in December as expected, and the aggressive rate hike may come to an end.
On the other side of the North Atlantic, the ECB conveyed an interest rate hike message quite firm. On November 24, local time, the ECB released the minutes of the October monetary policy meeting. It shows that member states all agree that in view of current inflation prospects, easing policies should be abolished to normalize monetary policy and ensure that demand is no longer sustainable. The market expects the ECB to raise interest rates further to prevent the risk of inflation expectations becoming unanchored.
As monetary policies in Europe and the US continue to tighten, the market is beginning to look at the signs of economic decline. “In November, the US and Europe Purchasing Managers' Index (PMI) both fell into a contraction range. The inflection point of US monetary policy may not yet be reached, and the Fed may continue to raise interest rates to 5%. Continued interest rate hikes will increase the downside risk of the economy. “In 2023, there will be a 'stagflationary' recession or a probable event;” CICC believes, “Although US CPI inflation has cooled down in October, the Fed officials are generally cautious. Most officials still believe that interest rates should continue to be raised, and their attitude is firm. Some officials have even warned the market against overinterpreting inflation data. The first is that the Fed has little room for fault tolerance, and the second is that the monthly inflation data is not enough to completely reassure the Federal Reserve.”
Interest rate hikes continue
The minutes of the Federal Reserve's November interest rate meeting show that most officials support slowing down the pace of interest rate hikes, while some Fed officials want to see more data before the pace of interest rate hikes slows down. Officials attending the meeting said that given the uncertain lag in monetary policy, a slower rate hike would better allow the US Federal Open Market Committee (FOMC) to evaluate progress in achieving the goals.
Some participants believe that the final peak level of the federal funds rate, which is essential for the Commission to achieve its goals, will be slightly higher than previously predicted, inflationary pressure shows little sign of abating, and the risk of inflation prospects is still sloping upward.
US St. Louis Federal Reserve Chairman Brad believes that interest rates will peak at least 5.00%-5.25% during the current cycle of the Federal Reserve's interest rate hike. As long as the Federal Reserve sticks to its current path of austerity, a low inflation rate is expected soon. San Francisco Federal Reserve Chairman Daly and Minneapolis Federal Reserve Chairman Kashkari also said that it is not yet time for the Federal Reserve to stop continuing to raise interest rates. Boston Federal Reserve Chairman Koslin pointed out that currently there is still a possibility that the Fed will raise interest rates by 75 basis points.
Previously, US inflation eased in early October this year after continuing to be high for more than half a year. According to the data, the US consumer price index (CPI) rose 7.7% year on year in October, falling below 8% for the first time since March this year; the core CPI increased 6.3% year on year; the Federal Reserve's continuous aggressive interest rate hikes achieved initial results in curbing inflation, but it is still far from the target inflation level of 2%.
Since March of this year, the Federal Reserve has raised interest rates six times to a total of 375 BP. The financial environment has been drastically tightened, and expectations of a recession have increased, yet the fall in inflation is still slow and there are still upward risks. The Great Wall Securities macro team believes that the Federal Reserve will continue to raise the federal funds rate above the restrictive level to ensure that inflation expectations continue to decline. After the US recession in 2023, the Federal Reserve may quickly switch to cutting interest rates.
Compared to Federal Reserve officials sending signals to slow down interest rate hikes, the ECB is quite firm in signaling interest rate hikes. The minutes of the October monetary policy meeting released by the ECB show that all members agreed that given the current inflation outlook, monetary policy should continue to be normalized by canceling the easing policy to ensure that demand does not continue. Although monetary policy actions have had an expected impact on finance and financing conditions, the ECB's current setting of key policy interest rates is still considered loose, which means that interest rates should be raised further.
According to the data, Eurozone's harmonized CPI increased 10.7% year on year in October, expected 10.2%; core CPI increased 5.0% year on year, expected 5.0%, and the level of inflation is still stubborn. Since July of this year, the ECB has raised interest rates three times to accumulate 200BP, but the CPI and core CPI continued to rise in October, exceeding expectations year on year and month over month. Among them, energy and food prices are still the main driving forces driving the overall level of inflation higher.
CCS Peng Yuan also pointed out that the geopolitical conflict has recently escalated again, and it is still a probable event that the Eurozone will continue to raise interest rates by 75 BP in December. However, there are also some ECB personnel who believe that the interest rate will be raised by 50BP, which indicates that there is still some disagreement about the extent of the rate hike. It believes that the Eurozone economy will fall into recession is almost a trend, and the debt crisis should not be underestimated.
Liu Sijia, a macro analyst at Donghai Securities, believes that monetary policy must continue to be normalized to deal with the risk that long-term inflation expectations are unanchored and wage prices may spiral. Continued higher-than-expected inflation data, heightened uncertainty, and general upward risks to the inflation outlook are seen as requiring further action.
Overall, inflation in Europe is still at a high level, and energy prices have dropped somewhat from the previous period, but they are still significantly higher than before the Russian-Ukrainian conflict. A warm winter means that the pressure on European gas prices this winter may not be great, but there is still uncertainty about next year. According to the minutes of the meeting, current interest rates have not reached a neutral level, and the ECB may still maintain a relatively fast pace of interest rate hikes in the short term. However, from an economic perspective, the Eurozone may enter recession earlier than the US. Furthermore, in the process of rapidly rising interest rates, financial risks that may arise due to long-term easing may limit the extent of future interest rate hikes by the ECB.
The economy is under pressure
Austerity monetary policies are compounded by the effects of geographical conflicts, and signs of economic recession in Europe and the US are becoming more and more prominent. According to IHMarkit data, the initial value of the US manufacturing PMI for November was 47.6, a new low since May 2020; the initial value of the service sector PMI was 46.1, and the initial comprehensive PMI value was 46.3, all of which hit new lows since August this year and fell short of market expectations.
Chris Williamson, chief economist at S&P Global Market Intelligence, said that business conditions in the US deteriorated in November. According to preliminary PMI findings, output and demand are falling at a faster rate and are in line with the economy's 1% annual contraction rate. The headwinds brought about by rising living costs, tightening financial conditions, and especially rising borrowing costs, and weak demand in domestic and export markets are getting stronger.
Williamson pointed out that the reduction in supply chain pressure is to some extent a symptom of falling demand, but so far in the fourth quarter, recruitment activities have been slow everywhere as companies focus on reducing costs. In this environment, although inflationary pressure is likely to continue to cool down in the next few months, there is still a possibility that the US economy will fall further into recession.
According to data released by the University of Michigan, the final value of the US consumer confidence index for November was 56.8, lower than the October final value of 59.9; the consumer expectations index was 55.6. Both figures were lower than the October 59.9 and 56.2 levels.
The Great Wall Securities macro team believes that due to the lagging nature of monetary policy, the Federal Reserve's monetary overadjustment may no longer be avoided. By the time interest rates have an impact on economic entities, the US economy may quickly decline. As the financial environment is further tightened, corporate bond default rates rise, credit spreads may spread from low rated bonds to high rated bonds, and financial risks will increase.
In the Eurozone, the initial manufacturing PMI for November was 47.3, the service sector PMI was 48.6, and the initial composite PMI was 47.8, which was below the boom and dry line for the fifth consecutive month. Data showed that private sector activity in Germany and France, the Eurozone's “twin engines,” contracted in November. Germany, the largest economy in the Eurozone, recorded a PMI of 46.4, while France recorded 48.8, all below the boom and bust line.
Even so, the ECB is adamant about raising interest rates. ECB President Lagarde said that interest rates are expected to be raised from the current 1.5% to 2% or higher next month. Although the risk of a recession is rising, it is unlikely that the recession will significantly reduce inflation in the short term. ECB Governing Council Muller, ECB Governing Council and Bundesbank President Nagel, and ECB Vice President Guindos also all support the ECB's continued interest rate hikes, saying that interest rate hikes should not be postponed due to concerns about the economic recession.
Meanwhile, some ECB officials are advocating a slowdown in interest rate increases due to concerns about the recession. ECB Governing Council member Knot said the risk of a recession is increasing, and interest rate hikes may slow down as policies are further tightened. ECB Governing Council and Bank of France Governor Villeroy said that large interest rate hikes will not become a new habit, and interest rate hikes may slow down when interest rates exceed 2%. ECB Governing Council member Visco said that the reasons for reducing the aggressiveness of monetary policy actions are growing, and there is a risk that too fast and too drastic interest rate hikes may amplify and slow down economic activity, thus making price dynamics far below target.
According to the Nomura Securities Report, due to increased fiscal and external challenges, even mainland Europe is not immune to the threat of exchange rate collapse, and the Czech Republic, Romania, and Hungary will face the risk of a currency crisis within the next year. The Organization for Economic Cooperation and Development (OCED) also recently warned that the German economy is expected to shrink by 0.3% in 2023, while the growth rate of the French economy will drop to 0.6% during the same period.
Great Wall Securities said that the Federal Reserve's policy shift in 2023 may come sooner than expected by the market. According to market expectations, the Federal Reserve may start cutting interest rates in the fourth quarter of 2023. However, according to its forecast, the Federal Reserve may be able to cut interest rates in the middle of the year. Because once a deep recession occurs, the Fed's goal of reducing inflation can be completed ahead of schedule. At that time, the focus of the Fed's work will shift to dealing with the recession. Because keeping interest rates at restrictive levels will cause continuing and lagging damage to the US economy. However, the prerequisite for cutting interest rates is that the Federal Reserve now needs to continue to raise interest rates until a deep recession occurs; otherwise, it will be difficult for inflation to fall steadily. There is no contradiction between continuing interest rate hikes now causing the recession and cutting interest rates next year to deal with the recession. Because now inflation is still an important issue that the Federal Reserve needs to resolve. $S&P 500 Index(.SPX.US$ $Baidu(BIDU.US$
On November 23, 2022, local time, the Federal Reserve released the minutes of the November interest rate meeting. It shows that the Federal Reserve will continue to raise interest rates, but the pace of rate hikes will slow down and begin considering policy changes after the recession. The market expects that the Federal Reserve will raise interest rates by 50 basis points (BP) in December as expected, and the aggressive rate hike may come to an end.
On the other side of the North Atlantic, the ECB conveyed an interest rate hike message quite firm. On November 24, local time, the ECB released the minutes of the October monetary policy meeting. It shows that member states all agree that in view of current inflation prospects, easing policies should be abolished to normalize monetary policy and ensure that demand is no longer sustainable. The market expects the ECB to raise interest rates further to prevent the risk of inflation expectations becoming unanchored.
As monetary policies in Europe and the US continue to tighten, the market is beginning to look at the signs of economic decline. “In November, the US and Europe Purchasing Managers' Index (PMI) both fell into a contraction range. The inflection point of US monetary policy may not yet be reached, and the Fed may continue to raise interest rates to 5%. Continued interest rate hikes will increase the downside risk of the economy. “In 2023, there will be a 'stagflationary' recession or a probable event;” CICC believes, “Although US CPI inflation has cooled down in October, the Fed officials are generally cautious. Most officials still believe that interest rates should continue to be raised, and their attitude is firm. Some officials have even warned the market against overinterpreting inflation data. The first is that the Fed has little room for fault tolerance, and the second is that the monthly inflation data is not enough to completely reassure the Federal Reserve.”
Interest rate hikes continue
The minutes of the Federal Reserve's November interest rate meeting show that most officials support slowing down the pace of interest rate hikes, while some Fed officials want to see more data before the pace of interest rate hikes slows down. Officials attending the meeting said that given the uncertain lag in monetary policy, a slower rate hike would better allow the US Federal Open Market Committee (FOMC) to evaluate progress in achieving the goals.
Some participants believe that the final peak level of the federal funds rate, which is essential for the Commission to achieve its goals, will be slightly higher than previously predicted, inflationary pressure shows little sign of abating, and the risk of inflation prospects is still sloping upward.
US St. Louis Federal Reserve Chairman Brad believes that interest rates will peak at least 5.00%-5.25% during the current cycle of the Federal Reserve's interest rate hike. As long as the Federal Reserve sticks to its current path of austerity, a low inflation rate is expected soon. San Francisco Federal Reserve Chairman Daly and Minneapolis Federal Reserve Chairman Kashkari also said that it is not yet time for the Federal Reserve to stop continuing to raise interest rates. Boston Federal Reserve Chairman Koslin pointed out that currently there is still a possibility that the Fed will raise interest rates by 75 basis points.
Previously, US inflation eased in early October this year after continuing to be high for more than half a year. According to the data, the US consumer price index (CPI) rose 7.7% year on year in October, falling below 8% for the first time since March this year; the core CPI increased 6.3% year on year; the Federal Reserve's continuous aggressive interest rate hikes achieved initial results in curbing inflation, but it is still far from the target inflation level of 2%.
Since March of this year, the Federal Reserve has raised interest rates six times to a total of 375 BP. The financial environment has been drastically tightened, and expectations of a recession have increased, yet the fall in inflation is still slow and there are still upward risks. The Great Wall Securities macro team believes that the Federal Reserve will continue to raise the federal funds rate above the restrictive level to ensure that inflation expectations continue to decline. After the US recession in 2023, the Federal Reserve may quickly switch to cutting interest rates.
Compared to Federal Reserve officials sending signals to slow down interest rate hikes, the ECB is quite firm in signaling interest rate hikes. The minutes of the October monetary policy meeting released by the ECB show that all members agreed that given the current inflation outlook, monetary policy should continue to be normalized by canceling the easing policy to ensure that demand does not continue. Although monetary policy actions have had an expected impact on finance and financing conditions, the ECB's current setting of key policy interest rates is still considered loose, which means that interest rates should be raised further.
According to the data, Eurozone's harmonized CPI increased 10.7% year on year in October, expected 10.2%; core CPI increased 5.0% year on year, expected 5.0%, and the level of inflation is still stubborn. Since July of this year, the ECB has raised interest rates three times to accumulate 200BP, but the CPI and core CPI continued to rise in October, exceeding expectations year on year and month over month. Among them, energy and food prices are still the main driving forces driving the overall level of inflation higher.
CCS Peng Yuan also pointed out that the geopolitical conflict has recently escalated again, and it is still a probable event that the Eurozone will continue to raise interest rates by 75 BP in December. However, there are also some ECB personnel who believe that the interest rate will be raised by 50BP, which indicates that there is still some disagreement about the extent of the rate hike. It believes that the Eurozone economy will fall into recession is almost a trend, and the debt crisis should not be underestimated.
Liu Sijia, a macro analyst at Donghai Securities, believes that monetary policy must continue to be normalized to deal with the risk that long-term inflation expectations are unanchored and wage prices may spiral. Continued higher-than-expected inflation data, heightened uncertainty, and general upward risks to the inflation outlook are seen as requiring further action.
Overall, inflation in Europe is still at a high level, and energy prices have dropped somewhat from the previous period, but they are still significantly higher than before the Russian-Ukrainian conflict. A warm winter means that the pressure on European gas prices this winter may not be great, but there is still uncertainty about next year. According to the minutes of the meeting, current interest rates have not reached a neutral level, and the ECB may still maintain a relatively fast pace of interest rate hikes in the short term. However, from an economic perspective, the Eurozone may enter recession earlier than the US. Furthermore, in the process of rapidly rising interest rates, financial risks that may arise due to long-term easing may limit the extent of future interest rate hikes by the ECB.
The economy is under pressure
Austerity monetary policies are compounded by the effects of geographical conflicts, and signs of economic recession in Europe and the US are becoming more and more prominent. According to IHMarkit data, the initial value of the US manufacturing PMI for November was 47.6, a new low since May 2020; the initial value of the service sector PMI was 46.1, and the initial comprehensive PMI value was 46.3, all of which hit new lows since August this year and fell short of market expectations.
Chris Williamson, chief economist at S&P Global Market Intelligence, said that business conditions in the US deteriorated in November. According to preliminary PMI findings, output and demand are falling at a faster rate and are in line with the economy's 1% annual contraction rate. The headwinds brought about by rising living costs, tightening financial conditions, and especially rising borrowing costs, and weak demand in domestic and export markets are getting stronger.
Williamson pointed out that the reduction in supply chain pressure is to some extent a symptom of falling demand, but so far in the fourth quarter, recruitment activities have been slow everywhere as companies focus on reducing costs. In this environment, although inflationary pressure is likely to continue to cool down in the next few months, there is still a possibility that the US economy will fall further into recession.
According to data released by the University of Michigan, the final value of the US consumer confidence index for November was 56.8, lower than the October final value of 59.9; the consumer expectations index was 55.6. Both figures were lower than the October 59.9 and 56.2 levels.
The Great Wall Securities macro team believes that due to the lagging nature of monetary policy, the Federal Reserve's monetary overadjustment may no longer be avoided. By the time interest rates have an impact on economic entities, the US economy may quickly decline. As the financial environment is further tightened, corporate bond default rates rise, credit spreads may spread from low rated bonds to high rated bonds, and financial risks will increase.
In the Eurozone, the initial manufacturing PMI for November was 47.3, the service sector PMI was 48.6, and the initial composite PMI was 47.8, which was below the boom and dry line for the fifth consecutive month. Data showed that private sector activity in Germany and France, the Eurozone's “twin engines,” contracted in November. Germany, the largest economy in the Eurozone, recorded a PMI of 46.4, while France recorded 48.8, all below the boom and bust line.
Even so, the ECB is adamant about raising interest rates. ECB President Lagarde said that interest rates are expected to be raised from the current 1.5% to 2% or higher next month. Although the risk of a recession is rising, it is unlikely that the recession will significantly reduce inflation in the short term. ECB Governing Council Muller, ECB Governing Council and Bundesbank President Nagel, and ECB Vice President Guindos also all support the ECB's continued interest rate hikes, saying that interest rate hikes should not be postponed due to concerns about the economic recession.
Meanwhile, some ECB officials are advocating a slowdown in interest rate increases due to concerns about the recession. ECB Governing Council member Knot said the risk of a recession is increasing, and interest rate hikes may slow down as policies are further tightened. ECB Governing Council and Bank of France Governor Villeroy said that large interest rate hikes will not become a new habit, and interest rate hikes may slow down when interest rates exceed 2%. ECB Governing Council member Visco said that the reasons for reducing the aggressiveness of monetary policy actions are growing, and there is a risk that too fast and too drastic interest rate hikes may amplify and slow down economic activity, thus making price dynamics far below target.
According to the Nomura Securities Report, due to increased fiscal and external challenges, even mainland Europe is not immune to the threat of exchange rate collapse, and the Czech Republic, Romania, and Hungary will face the risk of a currency crisis within the next year. The Organization for Economic Cooperation and Development (OCED) also recently warned that the German economy is expected to shrink by 0.3% in 2023, while the growth rate of the French economy will drop to 0.6% during the same period.
Great Wall Securities said that the Federal Reserve's policy shift in 2023 may come sooner than expected by the market. According to market expectations, the Federal Reserve may start cutting interest rates in the fourth quarter of 2023. However, according to its forecast, the Federal Reserve may be able to cut interest rates in the middle of the year. Because once a deep recession occurs, the Fed's goal of reducing inflation can be completed ahead of schedule. At that time, the focus of the Fed's work will shift to dealing with the recession. Because keeping interest rates at restrictive levels will cause continuing and lagging damage to the US economy. However, the prerequisite for cutting interest rates is that the Federal Reserve now needs to continue to raise interest rates until a deep recession occurs; otherwise, it will be difficult for inflation to fall steadily. There is no contradiction between continuing interest rate hikes now causing the recession and cutting interest rates next year to deal with the recession. Because now inflation is still an important issue that the Federal Reserve needs to resolve. $S&P 500 Index(.SPX.US$ $Baidu(BIDU.US$
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