Rates are too low and inflation isn’t likely to drop below 4% until at least 2024. That’s according to BofA’s Michael Hartnett.
Although the “peak inflation” narrative was ascendant earlier this month, there’s a very real risk that July’s price growth figures for the US were a false dawn. European energy prices have since gone parabolic. German benchmark power exceeded 800 euros a megawatt hour on Friday, a new record. They rose nearly 40% this week alone. The French contract jumped 25%.
Comparing the US to Europe in the context of natural gas and power prices is apples to oranges currently for obvious reasons, but America isn’t totally insulated, especially vis-à-vis weather-related demand. Natural gas prices rose above $10 per million British thermal units for the first time since 2008 in the US this week.
Weaker currencies are exacerbating the commodity price shock in Europe, where what one analyst described as a “devastating” terms of trade shift is further undermining the euro, in a potentially perilous feedback loop. The last time oil prices were as high as they are now in euros, the ECB’s policy rate was far higher (figure below).
July’s 50bps hike from the ECB, the first in more than a decade, merely brought the depo rate to a “lofty” zero.
Both the ECB and the Bank of England face an impossible dilemma: Hike rates in what could be a futile (or even counterproductive) attempt to fight supply factor inflation, or don’t hike rates and risk being seen as derelict, thereby exacerbating concerns about the currency and chancing further pass-through effects.
In the UK, which Hartnett called the “stagflation lead indicator,” yields are at new highs, and sterling is beset (figure below).
Note that the pound is seen falling to a 37-year low by year-end.
The overarching message is that the world remains woefully out of balance. “Rates need to overshoot to reduce inflation, and key markets that determine inflation remain inflationary,” Hartnett went on to say, citing commodities, labor shortages and housing, which he noted is “simply decelerating from bubble levels,” not necessarily deflating in any meaningful sense.
With central banks “reluctant to reverse QE [and] politicians attempting to shield voters from economic pain, redress wealth inequality and soften the impact of new geopolitical isolationism via government spending and higher budget deficits, secular inflation seems here to stay,” Hartnett remarked, describing a “panic” on the political front, where fiscal policy easing “like stimulus checks and student debt forgiveness” could “leak into stocks.”
When it comes to Jackson Hole (and Fed policy more generally), a hawkish Fed is bullish, a dovish Fed is bearish, according to BofA. The “sooner the Fed plays the role of ‘the courageous lion,’ the better for macro and the better for markets,” the bank said.
“ Woefully out of balance” or a woeful new balance. Time will tell.
I believe the political dimension is not given enough credit for screwing up the economie of developing nations. In politics, planning and and long term thinking are not rewarded. Anger and dishonesty are the themes that attract attention. Even the best of our thought leaders, who make great observations, leave out the parts of the story that don’t aid their argument. This is destructive to any kind of consistent effort. I think I like subscribing here because there is less of all that.
I want to put a plug in for thinking like a trader. The fed, and business, have to probe and take what they find as only a few of many indicators. Clearly, most of the pieces of the virtuous cycle are gone, but the idea that in 30 days we will know whether there is an effect from the previous tightenings and that that we aren’t testing hunches and managing risk as best we can strikes me as the worst sort of bullshit…I’m always looking for the big stories that are being ignored. Some of those have migrated to the front page- water, warming, our conjflicts with Russia, China, Iran, Turkey, Saudi…..A three year onehundred year pandemic is a big messy piece of the story. But the one we’re not paying enough attention to-we and nato are at war with Russia and its allies. This, in my opinion is hard to quantify and hard to predict- but here goes- really bad energy crisis in uk and europe, food crisis in many places, Putin very slowly gets backed into a corner, and agrees to negotiate even though nobody trusts him. America fends off its facism crisis and then we all muddle through. Will real estate decline 30% along with the stock market? I hope so, because that would be a sign that not all the rules of physics have been repealed….