Uri Greenfeld, Psagot (photo by Rami Zaranger, Wikipedia)
Uri Greenfeld, the chief strategist of the Psagot investment house, says today that the markets are pricing in an interest rate cut in the US of 0.75% until the end of the year. The fear of an inflationary outbreak, says Greenfeld, will lead the central banks to maintain higher interest rates for longer than the markets embody, and the landing The reality ground will not have a failure.
“Forecasting linearly is not a bad forecasting method, but not one that allows us to learn about changes in the trend. If we look only at the last three years, we might think that we live in a world where inflation could erupt at any moment if the central banks do not aggressively raise interest rates.
More in-
“On the other hand, if we look at the last 15 years, it is likely that the conclusion will be that we live in a disinflationary world where the last 3 years are a statistical deviation that can be explained by an unusual event on any scale. While in only a few years we will know for sure what the “natural” inflation environment looks like for banks The centrals do not have that luxury and they need to act today to return inflation to be anchored to the target in the coming years. Therefore, their perception of the long-term trends is critical in this regard,” says Greenfeld.
“If you look at the markets today, there is no doubt that they choose the approach according to which the world is still disinflationary. According to this approach, the changes in the labor market are mainly cyclical and the low unemployment rate is due to the economic boom after the exit from the corona lockdowns. Therefore, according to this approach, after the interest rate increases by the central banks will achieve theirs and the unemployment rate will rise slightly to stop the wage pressures, it will be possible to reduce the interest rate again without provoking abnormal inflationary pressures again.
“If this is indeed the case, the bond market is quite rightly pricing in that the interest rate in the US or Israel is very close to the peak and may fall towards the end of the year. Similarly, if we assume that after the soft landing of the first half of 2023 the world will return to growth in the second half without triggering high inflation Too, the stock markets look overall attractive in such a scenario where we see a combination of falling yields along the curve and increasing profit in a few months.
“By the way” he says “since you asked then we are closer in perception to this approach as three of the four forces that have kept inflation low for years – demography, technology, the high level of debt and globalization are still relevant and perhaps even more relevant than ever.
“On the other hand, if we assume that the changes in the labor market are also structural and that the lack of workers is a constant problem, then the markets are really not priced properly. As far as the bond market is concerned, in such a scenario the interest rate peak is certainly close because the real interest rate is already high enough to cause a slowdown and will even continue to rise when expectations Inflation will continue to fall. The retail sales and industrial production data released last week show that the interest rate hikes are beginning to be reflected in parts of the economy that are not the real estate market, which is certainly in line with the reasonable schedule of monetary policy, as it usually works.
“However, the futures currently embody an interest rate reduction of 75 basis points until the end of 2023 and of 200 basis points until the end of 2024, which is less likely if the Fed continues to fear inflation that could erupt in the labor market. Interest rate reductions towards the end of the year and a return to growth will bring us Very quickly to renewed inflationary pressures.
“In such a scenario, there are two possibilities: either the central banks will have to keep the interest rate higher for longer than is currently the case and the landing will not be so soft, or the interest rate will rise again into the territory of monetary reduction faster than it seems at the moment. Either way, this is not a scenario that is priced in the markets , certainly not in the stock market. In order for the stock market to be attractive at the current pricing, it has to give the investor a sufficiently high risk premium and/or an expected increase in profit. In this scenario where interest and bond yields remain higher over time and the profits of the companies are expected to be significantly damaged, The stock market does not respond to that,” concludes Greenfeld.
Comments to the article(0):
Your response has been received and will be published subject to the system policy.
Thanks.
for a new comment
Your response was not sent due to a communication problem, please try again.
Return to comment