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Peak inflation? The new dilemma of central banks

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The world’s leading central banks spoke tough this week, but held a smaller stick.

After a series of meetings on Wednesday and Thursday, the Federal Reserve, the European Central Bank and the Bank of England chose to shift their anti-inflationary strategy from the recent pattern of 0.75 percentage point hikes to half a point. Switzerland, Norway, Mexico and the Philippines also slowed the rate hike.

They married weaker, but with words stronger. The Fed spoke of “more work to be done” to defeat high inflation, the European Central Bank spoke of “more ground to cover” while the Bank of England insisted it had to be “strong” in combating rising prices.

These moves were far from coordinated. Instead, the world’s central banks are trying to buy the space to raise interest rates further if they feel necessary at a time when clearly peaking inflation in many countries could make it more politically complicated.

Most central banks are nearing the peak of their policy rates, says Seth Carpenter, who spent 15 years at the Federal Reserve and is now chief global economist at Morgan Stanley, a rate most likely to cause a sharp slowdown or recession in their economies. As a result, he said it was a wise strategic move to suggest more action now.

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“For central bankers, they really have a responsibility for macroeconomic stability,” he says. “So I think they’d rather be wrong by talking tough and saying they’re ready to keep raising prices even more and then happily finding out later they don’t have to do more, than telling the world they’re done and then going, ‘Oops, we have to do more.’”

Hawk forecast

Fed Go first On Wednesday, he broke a series of four hikes of 0.75 percentage point and implemented a half-point increase so that interest rates now fall into a target range between 4.25 percent and 4.5 percent.

The unanimous decision to slow the rate of increases was accompanied by hawkish expectations and rhetoric. A new set of economic projections indicated officials intend to raise the policy rate to just over 5 percent next year, with no rate cuts until 2024. Fed Chairman Jay Powell sought to eliminate any lingering doubts about plans US central bank to eliminate “unacceptably high inflation.”

“We’ve covered a lot of ground, and the full effects of our rapid tightening so far are yet to be felt,” he told reporters. “However, we have more work to do.”

In Frankfurt, interest rates remain at 2 per cent much lower than in the US, but Christine Lagarde, the head of the European Central Bank, has insisted that a lower rate hike than at previous meetings was not a shift towards ending the tightening cycle. interest that sounded.

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“The ECB is not spinning around a pivot,” she said, adding that the eurozone central bank has “more ground to cover, and we have more time to go to,” than the Fed. Its near promise of another half-percentage-point rate hike coming in February and March surprised economists, many of whom expected the central bank to quickly end its rate-raising cycle in the next few months.

Ukrainian firefighters work to put out a fire at the site of a Russian bombing in the town of Vyshgorod, north of Kyiv.
Firefighters in the town of Vyshgorod, north of Kyiv, put out a fire at the site of a Russian bombing. Inflation and growth in almost all countries depend on the progress of the war in Ukraine © Efrem Lukatsky / AP

In the UK, where the authorities enjoy less international standing than during the disastrous September mini-balance sheet, the Bank of England raised interest rates for the ninth consecutive meeting to 3.5 per cent, the highest in 14 years. Bank of England Governor Andrew Bailey insisted the move was prompted by more evidence that inflation was becoming ingrained in private sector wage increases. He said this, “Warrantied[d] More aggressive monetary policy response.

Although the initial causes of high inflation differ in the eurozone, the United Kingdom and the United States, economists pointed out that the three central banks face the same difficult challenge on the communications of 2023.

General inflation has almost certainly peaked and will fall next year, but officials are far from certain that underlying inflationary pressures will also disappear. Their concern is that inflation will take too long to return to their hoped-for 2 percent targets and may continue at a much higher rate.

Some concerns about future inflation in Europe relate to how long it will take for the energy shock of 2022 to fully work its way through the economy.

The three central banks are concerned that domestic service sector prices may continue to rise strongly in still-tight labor markets where wages are rising at higher rates than they think is compatible with the 2 percent inflation target.

With this challenging year ahead, financial markets have struggled over the past few days to interpret interest rate decisions and communications coming from central bankers.

They found the ECB’s message easier to interpret. Lagarde’s words were more aggressive than I expected and “caused the largest market reaction,” according to Philip Shaw of investment firm Investec. The benchmark S&P 500 fell 2.5 percent on Thursday on hawkish noises from the European Central Bank.

Krishna Guha, head of policy and central bank strategy at US brokerage Evercore-ISI, says, “I take Lagarde at her word when she says the ECB will continue to run aggressively.” Like many analysts, Guha raised his forecast for a potential peak in the European Central Bank’s deposit rate from 2.75 percent to 3.5 percent after Lagarde’s comments on Thursday.

In contrast, many Wall Street investors question the Fed’s resolve to continue raising interest rates or are betting that the US central bank will back down at the first sign of real economic distress. Despite Powell’s protests on Wednesday, traders in the federal funds futures markets confirmed their bets that the interest rate will peak below 5 percent next year and that the central bank will cut rates by next December.

“The market isn’t buying it,” says Tiffany Wilding, North American economist at Pimco, a bond fund manager.

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Complicating the Fed’s messaging is the fact that Powell did not explicitly rule out on Wednesday the Fed again lowering interest rate hikes at its next policy meeting and implementing a quarter-point increase. UK markets also interpreted the Bank of England’s behavior as somewhat dovish and moderately reduced their expectations for future interest rate hikes.

The most important question that revolves around the diverse reactions of the market is what the basic strategy of central banks is likely to be in 2023 with lower headline inflation.

Many economists believe that policy makers want to act decisively before inflation has fallen enough and economic conditions have become so difficult that further price rises are difficult to explain.

Dario Perkins, global macroeconomist at TS Lombard, a consultancy, says tough talk about monetary policy is part of the game central bankers play to give caution in bargaining wages and setting corporate prices, saying they have “an incentive to compound recessionary risks” because they Helpful in relieving inflationary pressure.

But a large number of economists also worry that the hawkish voices from central banks are real and that policymakers will go too far, triggering a deeper recession than officials want or believe is necessary to tame higher prices.

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Many ECB watchers believe, for example, that the Frankfurt-based institution was too pessimistic about inflation and too optimistic about growth in its latest forecasts this week, putting it at risk of raising interest rates too much.

Carsten Brzeski, head of macro research at Dutch bank ING, says the ECB may have to scale back plans to aggressively raise interest rates once it realizes that its “projections for the eurozone economy are overly optimistic”.

Tom Porcelli, chief US economist at investment bank RBC Capital Markets, has a similar view on the Fed. “The reversal will happen faster than some people seem to appreciate, and I think that will probably be true of most central banks around the world,” he says. “You have large economies that are either on the verge of recession, approaching recession, or already in recession. You don’t need to be a great tea leaf reader to see what’s coming in the not too distant future.”

Covid-19 tests are being carried out at a kiosk on a street in Shanghai
Covid-19 tests are being carried out at a kiosk on a street in Shanghai. Central banks will closely monitor the success of China’s move away from a zero Covid policy and its impact on inflation. © Alex Plaveski / EPA-EFE / Shutterstock

This divergent view between those who say central bankers show adequate concern about persistent inflation risks versus those who think the tough messaging is real and excessive shows just how difficult it is to gauge the economic outlook for 2023.

Inflation and growth in almost all countries depend on the progression of the war in Ukraine, which will affect energy prices, the success of China’s move away from a zero Covid policy, the uncertain effects of interest rate hikes already implemented and the risks that households and businesses tighten their belts as deflation looms, Which greatly makes it worse.

The Bank of England is already happily using the word recession to describe the UK’s outlook, warning that the current downturn could be prolonged. While the ECB talks about the possibility of a “short and shallow” recession lasting only the next two quarters, the Fed’s Powell says it is not known whether the US will slide into recession. A soft landing is still a possibility for the US economy.

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Central banks haven’t had to defeat a serious bout of inflation in 40 years, and few are confident that they know whether officials have done too little, enough, or too much with interest rates yet to ensure they can restore price stability to advanced economies. .


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We need to pay more attention to skewed economic signals

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The writer is chair of Queen’s College, Cambridge and advisor to Allianz and Gramercy

Inflation was the dominant economic and financial issue of 2022 for most countries around the world, especially for advanced economies that have a consequential impact on the global economy and markets.

The effects have been seen in declining living standards, increasing inequality, increasing borrowing costs, stock and bond market losses, and occasional financial mishaps (fortunately small and so far contained).

In this new year, recession, both actual and feared, has joined inflation in the driving seat of the global economy and is likely to replace it. It’s a development that makes the global economy and investment portfolios subject to a wide range of possible outcomes — something that a growing number of bond investors seem to be aware of more than their equity counterparts.

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International Monetary Fund iYou will likely review soon Her economic growth forecasts again, predicting that “a third of the world will be hit by recession this year”. What is particularly notable to me about these worsening global prospects is not only that the world’s three major economic regions – China, the European Union and the United States – are slowing down together, but also that this is happening for different reasons.

In China, a chaotic exit from the wrong Covid-19 policy is undermining demand and causing more supply disruptions. Such headwinds to domestic and global economic well-being will continue as long as China fails to improve the coverage and effectiveness of its vaccination efforts. The strength and sustainability of the subsequent recovery will also require that the country more vigorously renew a growth model that can no longer rely on greater globalization.

The European Union continues to deal with energy supply disruptions as the Russian invasion of Ukraine continues. Strengthening inventory management and reorientation of energy supplies is well advanced in many countries. However, it is not yet sufficient to lift immediate constraints on growth, let alone resolve long-term structural headwinds.

The United States has the least problematic view. The headwinds to growth are due to the Fed’s struggle to contain inflation after mischaracterizing rate increases as fleeting and then initially being too timid to adjust monetary policy.

The Fed’s shift to an aggressive front-load of interest rate hikes came too late to prevent the spread of inflation in the services sector and wages. As such, inflation is likely to remain stubborn at around 4 percent, be less sensitive to interest rate policies and expose the economy to greater risk for accidents from additional policy errors that undermine growth.

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The uncertainties facing each of these three economic areas suggest that analysts should be more careful in reassuring us that recessionary pressures will be “short and shallow”. They need to be open, if only to avoid repeating the mistake of prematurely dismissing inflation as transient.

This is especially important because these diverse drivers of recessionary risk make financial fragility more threatening and policy shifts more difficult, including potentially Japan. Get out of interest rate control Policy. The range of possible outcomes is extraordinarily large.

On the one hand, a better policy response, including improving the supply response and protecting the most vulnerable populations, can counteract the global economic slowdown and, in the case of the United States, avert a recession.

On the other hand, additional policy errors and market turmoil can lead to self-reinforcing vicious cycles with rising inflation and rising interest rates, weakening credit and compressed earnings, and stressing market performance.

Judging by market prices, more bond investors are better understanding this, including by refusing to follow the Fed’s interest rate guidance this year. Instead of a sustainable path to higher rates for 2023, they believe recessionary pressures will lead to cuts later this year. If true, government bonds would provide the yield and potential for badly missed portfolio risk mitigation in 2022.

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However, parts of the stock market is still weakly bearish pricing. Reconciling these different scenarios is more important than investors. Without better alignment within markets and with policy signals, the positive economic and financial outcomes we all desire will be no less likely. They will also be challenged by the risk of more unpleasant outcomes at a time of less economic and human resilience.

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Macro hedge funds end 2022 higher, investors say, while many others take big losses By Reuters

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© Reuters. FILE PHOTO: Traders work on the trading floor of the New York Stock Exchange (NYSE) in New York City, US, January 5, 2023. REUTERS/Andrew Kelly

By Svea Herbst Baylis

NEW YORK (Reuters) – Some hedge funds betting on macroeconomic trends have boasted of double and even triple-digit gains for 2022, while other high-profile companies that have long been on technology stocks have suffered heavy losses in volatile markets, investors said.

Rokos Capital, run by Chris Rokos and one of a handful of so-called global macro companies, gained 51% last year. Fund investors this week, who asked not to be identified, said Brevan Howard Asset Management, the company where Rokos once worked, posted a gain of 20.14% and Caxton Associates returned 16.73%.

Haider Capital Management’s Haider Jupiter Fund rose 193%, an investor said.

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Data from hedge fund research showed that many macro managers have avoided crumbling stock markets that have been rocked by rapid interest rate increases and geopolitical turmoil, including the war in Ukraine, to rank among the best performers in the hedge fund industry. The company’s macro index rose 14.2% while the general index of hedge funds fell 4.25%, its first loss since 2018.

Equity hedge funds, where the bulk of the industry’s roughly $3.7 trillion in assets are invested, fared worse with a loss of 10.4%, according to HFR data. And while that beat the broader stock market’s loss of 19.4%, some high-profile funds posted even bigger losses.

Tiger Global Management lost 56% while Whale Rock Capital Management ended the year with a 43% loss and Maverick Capital lost 23%. Coatue Management ended 2022 with a loss of 19%.

But not all companies that bet on technology stocks suffered. John Thaler JAT Capital finished the year with a 3.7% gain after fees after a 33% increase in 2021 and a 46% gain in 2020.

Sculptor Capital Management (NYSE::), where founder Dan Och is fighting the company’s current CEO in court over his salary increase, posted a 13% drop.

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David Einhorn’s Greenlight Capital, which bet that Elon Musk would be forced to buy Twitter, ended the year up 37% while Rick Sandler’s Eminence Capital rose 7%.

A number of so-called multi-manager companies where teams of portfolio managers bet on a variety of sectors also boast positive returns and have been able to deliver on their promise that hedge funds can deliver better returns in distressed markets.

Balyasny’s Atlas Fund (NYSE: Enhanced) gained 9.7%, while Point72 Asset Management gained 10%. Millennium Management gained 12% while Carlson Capital ended the year with a 7% gain.

Representatives for the companies either did not respond to requests for comment or declined to comment.

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German automakers point to easing supply chain problems

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Sales at BMW and Mercedes-Benz jumped in the final months of 2022 as the German premium auto brands indicated supply chain problems plaguing the industry were abating.

Automakers around the world have experienced parts shortages since the pandemic, especially semiconductors, leaving many of them with large fleets of incomplete vehicles that can’t be delivered to customers.

BMW and Mercedes each said their full-year vehicle deliveries fell last year by 4.8 percent and 1 percent, respectively, due to Suppliers Bottlenecks as well as lockdowns in China and the war in Ukraine.

But supply pressures eased in the last quarter of the year, as BMW recorded a 10.6 percent jump in sales, with 651,798 vehicles delivered, and Mercedes fulfilling 540,800 orders, up 17 percent from the same period in 2022.

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BMW He said the main effects of supply chain bottlenecks and continued lockdowns were felt in the first six months of the year, adding that “sales were steadily picking up in the second half.”

Mercedes boss Ula Kallenius told the Financial Times last week that the list of problems in the auto supply chain was declining, but added that long waits for cars would continue into 2023.

“One chip is enough to be vital [ . . .] Missing, and then you can’t finish the car, even if you have everything else.

Both brands recorded strong sales growth electric car. Mercedes, which last week announced a plan to build 10,000 charging docks, said EV shipments grew 124 percent to 117,800 last year compared with its predecessor.

Similarly, BMW reported strong growth in electric vehicle sales, with deliveries of fully electric vehicles doubling last year to 215,755.

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Analysts at Bank of America said that sales of electric vehicles, including hybrid cars, reached a historic peak last November, with 1.1 million units sold. They attributed this largely to the upcoming phase-out of customer subsidies in Germany.

Participate in Mercedes BMW and BMW prices held steady Tuesday morning as investors priced in an image of an improving showing.

Rolls-Royce, a subsidiary of BMW, announced Monday that sales have hit a 119-year record, driven by strong demand in the United States, its largest market.

The luxury brand has been largely unaffected by the semiconductor pressure, mainly because it makes relatively few compounds and therefore needs fewer chips.

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