The continuous interest rate hikes by central banks in Europe and the USA indicate that economic recession may be inevitable.
$NASDAQ 100 Index (.NDX.US)$ Economic Observer reporter Liang Ji. Inflation pressures have not subsided, and monetary tightening continues. Recently, central banks in Europe and the USA successively released minutes of monetary policy meetings, reiterating their intention to continue tightening monetary policy to curb inflation.
On November 23, 2022, the Federal Reserve released minutes of the November interest rate meeting. It showed that the Federal Reserve will continue to raise interest rates, but the pace of rate hikes will slow down, and they will begin to consider policy changes after an economic recession. The market expects the Fed to raise rates by 50 basis points as expected in December, with aggressive rate hikes possibly coming to a halt.
On the other side of the Atlantic, the message of interest rate hikes from the European Central Bank appears resolute. On November 24, the European Central Bank released minutes of the October monetary policy meeting, where it was agreed among member countries that, given the current inflation outlook, loose policies should be phased out to normalize monetary policy and ensure that demand does not remain excessive. The market expects the European Central Bank to further increase interest rates to prevent the risk of inflation expectations becoming unanchored.
Amid continued tightening of monetary policies in Europe and the USA, the market is beginning to focus on the signals reflecting economic recession. In November, the PMI of the USA and Europe both fell into the contraction range. The turning point of the US monetary policy may not have arrived yet, and the Federal Reserve may continue to raise interest rates to 5%, which would increase the risk of economic downturn. The trend towards 'stagflation-style' recession in 2023 is a high probability event; China International Capital Corporation believes that, despite the slight cooling in US October CPI inflation, most Fed officials remain cautious and advocate for further interest rate hikes, with a relatively firm attitude. Some officials even warn the market not to overly interpret inflation data. One reason is the limited error tolerance of the Federal Reserve, and the other is that monthly inflation data is not enough to entirely reassure the Federal Reserve.
Rate hikes continue.
Minutes from the November Federal Reserve meeting showed that most officials support slowing the pace of rate hikes, while some Fed officials would like to see more data before slowing down. Attendees indicated that due to the uncertain lag of monetary policy, a slower rate hike pace will allow the Federal Open Market Committee (FOMC) to better assess progress towards its goals.
Some participants believe that the final peak level of the federal fund rate, which is crucial for the committee to achieve its goals, will be slightly higher than previous forecasts. There is almost no sign of easing inflation pressure and the risks to the inflation outlook remain skewed to the upside.
St. Louis Federal Reserve President Bullard believes that the peak interest rate of this round of Fed rate hikes should reach at least 5.00%-5.25%. As long as the Fed sticks to its current tightening path, a low inflation rate is expected to occur soon. San Francisco Federal Reserve President Daly and Minneapolis Federal Reserve President Kashkari have both indicated that it is not yet time for the Fed to stop raising rates. Boston Federal Reserve President Rosengren also pointed out the possibility of a 75 basis point rate hike by the Fed.
Earlier, after being at high levels for most of the year, US inflation eased in early October. Data shows that US October Consumer Price Index (CPI) rose by 7.7% year-on-year, dropping below 8% for the first time since March this year; core CPI rose by 6.3% year-on-year. The Fed's consecutive aggressive rate hikes have initially curbed inflation, but there is still a considerable distance to the 2% target inflation level.
Since March of this year, the Fed has hiked rates six times, accumulating 375 basis points, significantly tightening financial conditions and enhancing expectations of an economic downturn. However, the decline in inflation remains slow and there are still upside risks. The china great wall macro team believes that the Fed will continue to raise the federal fund rate above restrictive levels to ensure that inflation expectations continue to decline. After the US economic downturn in 2023, the Fed may quickly switch to rate cuts.
In contrast to the signal from Fed officials to slow down rate hikes, the European Central Bank (ECB) remains firm on its rate hike signal. Minutes from the ECB's October monetary policy meeting showed unanimous agreement among members that given the current inflation outlook, it is necessary to continue normalizing monetary policy by phasing out accommodative policies to ensure that demand no longer persists. Although monetary policy actions have had the expected impact on financial and financing conditions, the current setting of key ECB policy rates is considered accommodative, which implies that rates should be raised further.
Data shows that in October, the eurozone's Harmonized Index of Consumer Prices (HICP) rose by 10.7% year-on-year, surpassing the expected 10.2%; the core HICP rose by 5.0% year-on-year, in line with expectations at 5.0%, indicating persistent high levels of inflation. Since July, the ECB has hiked rates three times, accumulating 200 basis points. However, October HICP and core HICP exceeded expectations in both year-on-year and month-on-month terms, continuing to rise, with energy and food prices remaining the main drivers pushing overall inflation levels higher.
China Pengyuan pointed out that the recent geopolitical conflicts have escalated, and the Eurozone is still likely to raise interest rates by 75BP in December. However, some members of the European Central Bank also believe that a 50BP rate hike is possible, indicating a certain degree of disagreement on the magnitude of the rate hike. It is believed that the Eurozone economy is almost certain to fall into a recession, and the debt crisis should not be underestimated.
Donghai Securities' macro analyst Liu Sijia believes that monetary policy must continue to normalize in order to address the risks of long-term inflation expectations unanchoring and the possible emergence of a wage-price spiral. The inflation data consistently exceeding expectations, increasing uncertainty, and generally elevated inflation prospects are seen as necessitating further action.
Overall, European inflation remains high, energy prices have fallen compared to the previous period but are still significantly higher than before the Russia-Ukraine conflict. A mild winter implies that the pressure on natural gas prices in Europe this winter may not be significant, but uncertainties remain next year. Based on meeting minutes, current interest rates have not yet reached a neutral level, and in the short term, the European Central Bank may still maintain a relatively fast pace of rate hikes. However, from an economic perspective, the Eurozone may enter a recession earlier than the USA, and the potential financial risks arising from the rapid increase in interest rates due to long-term loose policies may constrain the European Central Bank's future rate hikes significantly.
Economic Pressure
The tightening of monetary policy combined with the impact of geopolitical conflicts has made the signals of economic recession in Europe and the USA more pronounced. IHS Markit data shows that the initial value of the US Manufacturing PMI in November was 47.6, hitting a new low since May 2020; the initial value of the Service PMI was 46.1, and the Composite PMI was 46.3, all hitting new lows since August this year and below market expectations.
Chris Williamson, Chief Economist of S&P Global Market Intelligence, stated that the business conditions in the USA deteriorated in November. According to preliminary PMI survey results, output and demand are declining at a faster pace, consistent with an annual shrinkage rate of 1%. Rising living costs, tightening financial conditions especially rising borrowing costs, and the increasing headwinds from weak domestic and export market demand are becoming stronger.
Williamson pointed out that the easing of supply chain pressures is to some extent a symptom of declining demand, but recruitment activities in various regions have been very slow so far in the fourth quarter as companies are focused on cost reduction. In this environment, although inflationary pressures may continue to ease in the coming months, there is still a possibility of further economic recession in the USA.
Data released by the University of Michigan shows that the final value of the US Consumer Confidence Index in November was 56.8, lower than the October final value of 59.9; the Consumer Expectations Index was 55.6, both lower than the levels of 59.9 and 56.2 in October.
China Great Wall Securities' macro team believes that due to the lag of monetary policy, the possibility of overshooting by the Federal Reserve may have become inevitable. When interest rates start to impact the real economy, the US economy may quickly decline. With the further tightening of the financial environment, corporate bond default rates are rising, and the widening of credit spreads may spread from low-rated bonds to high-rated bonds, exacerbating financial risks.
In the Eurozone, the preliminary value of the manufacturing PMI was 47.3 in November, the service PMI was 48.6, and the composite PMI was 47.8, all below the boom-bust line for the 5th consecutive month. Data shows that the 'twin engines' of the Eurozone, Germany and France, saw private sector activity shrink in November. The largest economies in the Eurozone recorded PMIs of 46.4 for Germany and 48.8 for France, both below the boom-bust line.
Despite this, the European Central Bank remains firm on raising interest rates. ECB President Lagarde stated that it is expected to raise the rate from the current 1.5% to 2% or higher next month. Although the risk of an economic recession is rising, it may not significantly lower inflation in the short term. ECB board members Muller and Nagel, along with ECB Vice President Guindos, all support further rate hikes, indicating that rate hikes should not be postponed due to concerns about economic recession.
At the same time, some ECB officials advocate slowing down rate hikes due to concerns about economic recession. ECB board member Knot stated that the risk of an economic recession is increasing, and with further tightening of policies, rate hikes may slow down. ECB board member Villeroy mentioned that substantial rate hikes would not become a new habit, and the speed of rate hikes may slow down once rates exceed 2%. ECB board member Visco highlighted the increasing reasons to reduce the aggressiveness of monetary policy actions, as there is a risk of excessively fast and large rate hikes amplifying and slowing down economic activities, leading to price dynamics significantly below the target.
Nomura Securities report suggests that due to increasing fiscal and external challenges, even the European continent could not be immune to the threat of exchange rate collapse. Countries like Czech Republic, Romania, and Hungary may face the risk of a currency crisis within the next year. The OECD recently warned that the German economy is expected to shrink by 0.3% in 2023, while the growth rate of the French economy is revised down to 0.6% for the same period.
China Great Wall Securities stated that the Federal Reserve's policy shift in 2023 may happen faster than market expectations. According to market expectations, the Fed may start cutting interest rates in the fourth quarter of 2023. However, their estimation suggests that the Fed may lower rates as early as mid-year. This is because once a deep recession occurs, the Fed's inflation target can be achieved ahead of schedule, and then the focus will shift to addressing the recession. Keeping rates at restrictive levels will cause sustained and lagging harm to the US economy. However, the premise for rate cuts is that the Fed still needs to continue raising rates until a deep recession occurs, otherwise stable inflation is unlikely to decline. Continuing to raise rates now can prepare for a recession and easing next year to address the recession, as it is crucial for the Fed to tackle inflation issues at present. $S&P 500 Index (.SPX.US)$ $Baidu (BIDU.US)$
On November 23, 2022, the Federal Reserve released minutes of the November interest rate meeting. It showed that the Federal Reserve will continue to raise interest rates, but the pace of rate hikes will slow down, and they will begin to consider policy changes after an economic recession. The market expects the Fed to raise rates by 50 basis points as expected in December, with aggressive rate hikes possibly coming to a halt.
On the other side of the Atlantic, the message of interest rate hikes from the European Central Bank appears resolute. On November 24, the European Central Bank released minutes of the October monetary policy meeting, where it was agreed among member countries that, given the current inflation outlook, loose policies should be phased out to normalize monetary policy and ensure that demand does not remain excessive. The market expects the European Central Bank to further increase interest rates to prevent the risk of inflation expectations becoming unanchored.
Amid continued tightening of monetary policies in Europe and the USA, the market is beginning to focus on the signals reflecting economic recession. In November, the PMI of the USA and Europe both fell into the contraction range. The turning point of the US monetary policy may not have arrived yet, and the Federal Reserve may continue to raise interest rates to 5%, which would increase the risk of economic downturn. The trend towards 'stagflation-style' recession in 2023 is a high probability event; China International Capital Corporation believes that, despite the slight cooling in US October CPI inflation, most Fed officials remain cautious and advocate for further interest rate hikes, with a relatively firm attitude. Some officials even warn the market not to overly interpret inflation data. One reason is the limited error tolerance of the Federal Reserve, and the other is that monthly inflation data is not enough to entirely reassure the Federal Reserve.
Rate hikes continue.
Minutes from the November Federal Reserve meeting showed that most officials support slowing the pace of rate hikes, while some Fed officials would like to see more data before slowing down. Attendees indicated that due to the uncertain lag of monetary policy, a slower rate hike pace will allow the Federal Open Market Committee (FOMC) to better assess progress towards its goals.
Some participants believe that the final peak level of the federal fund rate, which is crucial for the committee to achieve its goals, will be slightly higher than previous forecasts. There is almost no sign of easing inflation pressure and the risks to the inflation outlook remain skewed to the upside.
St. Louis Federal Reserve President Bullard believes that the peak interest rate of this round of Fed rate hikes should reach at least 5.00%-5.25%. As long as the Fed sticks to its current tightening path, a low inflation rate is expected to occur soon. San Francisco Federal Reserve President Daly and Minneapolis Federal Reserve President Kashkari have both indicated that it is not yet time for the Fed to stop raising rates. Boston Federal Reserve President Rosengren also pointed out the possibility of a 75 basis point rate hike by the Fed.
Earlier, after being at high levels for most of the year, US inflation eased in early October. Data shows that US October Consumer Price Index (CPI) rose by 7.7% year-on-year, dropping below 8% for the first time since March this year; core CPI rose by 6.3% year-on-year. The Fed's consecutive aggressive rate hikes have initially curbed inflation, but there is still a considerable distance to the 2% target inflation level.
Since March of this year, the Fed has hiked rates six times, accumulating 375 basis points, significantly tightening financial conditions and enhancing expectations of an economic downturn. However, the decline in inflation remains slow and there are still upside risks. The china great wall macro team believes that the Fed will continue to raise the federal fund rate above restrictive levels to ensure that inflation expectations continue to decline. After the US economic downturn in 2023, the Fed may quickly switch to rate cuts.
In contrast to the signal from Fed officials to slow down rate hikes, the European Central Bank (ECB) remains firm on its rate hike signal. Minutes from the ECB's October monetary policy meeting showed unanimous agreement among members that given the current inflation outlook, it is necessary to continue normalizing monetary policy by phasing out accommodative policies to ensure that demand no longer persists. Although monetary policy actions have had the expected impact on financial and financing conditions, the current setting of key ECB policy rates is considered accommodative, which implies that rates should be raised further.
Data shows that in October, the eurozone's Harmonized Index of Consumer Prices (HICP) rose by 10.7% year-on-year, surpassing the expected 10.2%; the core HICP rose by 5.0% year-on-year, in line with expectations at 5.0%, indicating persistent high levels of inflation. Since July, the ECB has hiked rates three times, accumulating 200 basis points. However, October HICP and core HICP exceeded expectations in both year-on-year and month-on-month terms, continuing to rise, with energy and food prices remaining the main drivers pushing overall inflation levels higher.
China Pengyuan pointed out that the recent geopolitical conflicts have escalated, and the Eurozone is still likely to raise interest rates by 75BP in December. However, some members of the European Central Bank also believe that a 50BP rate hike is possible, indicating a certain degree of disagreement on the magnitude of the rate hike. It is believed that the Eurozone economy is almost certain to fall into a recession, and the debt crisis should not be underestimated.
Donghai Securities' macro analyst Liu Sijia believes that monetary policy must continue to normalize in order to address the risks of long-term inflation expectations unanchoring and the possible emergence of a wage-price spiral. The inflation data consistently exceeding expectations, increasing uncertainty, and generally elevated inflation prospects are seen as necessitating further action.
Overall, European inflation remains high, energy prices have fallen compared to the previous period but are still significantly higher than before the Russia-Ukraine conflict. A mild winter implies that the pressure on natural gas prices in Europe this winter may not be significant, but uncertainties remain next year. Based on meeting minutes, current interest rates have not yet reached a neutral level, and in the short term, the European Central Bank may still maintain a relatively fast pace of rate hikes. However, from an economic perspective, the Eurozone may enter a recession earlier than the USA, and the potential financial risks arising from the rapid increase in interest rates due to long-term loose policies may constrain the European Central Bank's future rate hikes significantly.
Economic Pressure
The tightening of monetary policy combined with the impact of geopolitical conflicts has made the signals of economic recession in Europe and the USA more pronounced. IHS Markit data shows that the initial value of the US Manufacturing PMI in November was 47.6, hitting a new low since May 2020; the initial value of the Service PMI was 46.1, and the Composite PMI was 46.3, all hitting new lows since August this year and below market expectations.
Chris Williamson, Chief Economist of S&P Global Market Intelligence, stated that the business conditions in the USA deteriorated in November. According to preliminary PMI survey results, output and demand are declining at a faster pace, consistent with an annual shrinkage rate of 1%. Rising living costs, tightening financial conditions especially rising borrowing costs, and the increasing headwinds from weak domestic and export market demand are becoming stronger.
Williamson pointed out that the easing of supply chain pressures is to some extent a symptom of declining demand, but recruitment activities in various regions have been very slow so far in the fourth quarter as companies are focused on cost reduction. In this environment, although inflationary pressures may continue to ease in the coming months, there is still a possibility of further economic recession in the USA.
Data released by the University of Michigan shows that the final value of the US Consumer Confidence Index in November was 56.8, lower than the October final value of 59.9; the Consumer Expectations Index was 55.6, both lower than the levels of 59.9 and 56.2 in October.
China Great Wall Securities' macro team believes that due to the lag of monetary policy, the possibility of overshooting by the Federal Reserve may have become inevitable. When interest rates start to impact the real economy, the US economy may quickly decline. With the further tightening of the financial environment, corporate bond default rates are rising, and the widening of credit spreads may spread from low-rated bonds to high-rated bonds, exacerbating financial risks.
In the Eurozone, the preliminary value of the manufacturing PMI was 47.3 in November, the service PMI was 48.6, and the composite PMI was 47.8, all below the boom-bust line for the 5th consecutive month. Data shows that the 'twin engines' of the Eurozone, Germany and France, saw private sector activity shrink in November. The largest economies in the Eurozone recorded PMIs of 46.4 for Germany and 48.8 for France, both below the boom-bust line.
Despite this, the European Central Bank remains firm on raising interest rates. ECB President Lagarde stated that it is expected to raise the rate from the current 1.5% to 2% or higher next month. Although the risk of an economic recession is rising, it may not significantly lower inflation in the short term. ECB board members Muller and Nagel, along with ECB Vice President Guindos, all support further rate hikes, indicating that rate hikes should not be postponed due to concerns about economic recession.
At the same time, some ECB officials advocate slowing down rate hikes due to concerns about economic recession. ECB board member Knot stated that the risk of an economic recession is increasing, and with further tightening of policies, rate hikes may slow down. ECB board member Villeroy mentioned that substantial rate hikes would not become a new habit, and the speed of rate hikes may slow down once rates exceed 2%. ECB board member Visco highlighted the increasing reasons to reduce the aggressiveness of monetary policy actions, as there is a risk of excessively fast and large rate hikes amplifying and slowing down economic activities, leading to price dynamics significantly below the target.
Nomura Securities report suggests that due to increasing fiscal and external challenges, even the European continent could not be immune to the threat of exchange rate collapse. Countries like Czech Republic, Romania, and Hungary may face the risk of a currency crisis within the next year. The OECD recently warned that the German economy is expected to shrink by 0.3% in 2023, while the growth rate of the French economy is revised down to 0.6% for the same period.
China Great Wall Securities stated that the Federal Reserve's policy shift in 2023 may happen faster than market expectations. According to market expectations, the Fed may start cutting interest rates in the fourth quarter of 2023. However, their estimation suggests that the Fed may lower rates as early as mid-year. This is because once a deep recession occurs, the Fed's inflation target can be achieved ahead of schedule, and then the focus will shift to addressing the recession. Keeping rates at restrictive levels will cause sustained and lagging harm to the US economy. However, the premise for rate cuts is that the Fed still needs to continue raising rates until a deep recession occurs, otherwise stable inflation is unlikely to decline. Continuing to raise rates now can prepare for a recession and easing next year to address the recession, as it is crucial for the Fed to tackle inflation issues at present. $S&P 500 Index (.SPX.US)$ $Baidu (BIDU.US)$
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