February ends with a feeling of ‘don’t yell at me, I can’t see you’ or ‘don’t look at me, I can’t hear you’ in the always tense relationship between power stations and markets. Some set their policies, provide guidance on their next steps and the latter quote based on what they have understood can happen. However, for some time now, the disconnect between what the European Central Bank (ECB) or the Federal Reserve (Fed) say and do, with the interpretation of investors, once again causes temporary misunderstandings that later cause more or less adjustments. less strong in prices. If the month began with bullish music in stock and bond prices -bearish in yields-, now the record is playing backwards and the tightness of financial conditions and money stress are once again seen.
The world stock markets, with a better performance than the European indices and the Spanish Ibex 35 or the Italian Mib, have closed a disturbing week that leads them to lose almost everything they have gained since the last two monetary appointments. Bond interest has also begun to rise, thus reflecting the forecast of further increases in official rates. Even the 10-year US Treasury bond is once again close to 4%, it seems willing to put an end to the inverted curve -short terms pay more interest than long ones- that has been threatening it for quite some time.
On February 2, at the end of the conference with the press and ECB analysts, Christine Lagarde left the door wide open to raise interest rates in May after raising them by 50 basis points on March 16. That clean orientation was canceled and silenced by the noise that the labor market had caused the previous day and the risk of a reactivation of inflation made him think of “a couple of increases” more in rates. Both the guardian of the euro zone and the one of the dollar zone were more or less clear, they did not say anything about a pause in rate hikes -on the contrary-, but investors once again turned a deaf ear.
The mess has been to such an extent that the ECB has had to pull Isabel Schnabel, its toughest voice, up to three times in February, to put the dots over the i’s and point out again that the central bank is not thinking of taking a Rest. The Fed, for its part, has had to delete from its minutes the reference to the term “disinflation” that caused bells to fly among investors when Powell mentioned the issue 13 times. Just a week later, the governor himself had started picking up cable after igniting expectations of a rate break.
The economic situation on both sides of the Atlantic is better than expected after a year of Russia’s war in Ukraine that has turned prices in the global supermarket of raw materials upside down. Precisely because it is better, the ‘good news is bad news’ mantra has been reactivated for interest rate policy. For central banks, the only way to put out the inflation fire is to induce a recession in demand and so they are holding up financial conditions. The risk of this strategy is that the sought-after “soft landing” for the economy does not arrive and a “hard landing” will occur later on without the apparent supervision of the central bank.
The Euribor and the rates quote the resurgence of the underlying CPI
How long and where will rates continue to rise? Well, what both the Fed and the ECB said is that they will reach 5%-5.25% and 3.75%-4%, respectively, for May and they rule out 100% that there will be any cut in the first half of 2023. That was the central thesis of many investors at the end of last year but it will not be like that. The prevailing motto continues to be “higher rates… and higher rates for longer” because inflationary pressures are still in force and are even showing signs of reactivation. The central bankers once again point to the political leaders as to blame for a large part of the situation for the battery of measures that they have promoted indiscriminately in the last twelve months as a shield for the citizens, without realizing that in reality they are intraproductive in terms of their effects. second round
Spain is a clear example of this imbalance with headline inflation growing at 5.9% in January, among the lowest in the EU, but core inflation -excluding energy and food- that is skyrocketing to 7.5%, 2.2 points above the average European and among the highest in the euro. The Government has carried out one of the largest fiscal injections in history before the beginning of the electoral year, with regional ones in May and general ones, depending on what happens in the former, for June or December. The rise in pensions to 8.5% (17,000 million euros) and public salaries abundantly above the rickety or non-existent growth of private ones only sow imbalances in public accounts and are behind buenrio from buenrio of that resurface .
For the ECB, what happened in subjacent inflation is more important than in general, and what happens in Spain than in one of the smaller countries in the euro where CPI peaks above 20% have been recorded. If there are higher rate and Euribor rises than expected, bear in mind that this time it is not energy or war -which have been cooling the CPI for months- who are heating up inflation, the heaters are at the forefront of the governments and parliaments. Keep this in mind because one of the hoaxes that will be repeated the most during the next electoral campaign by the parties of the government coalition will be the one that blames the ECB, commercial banks and companies for all men who, in reality, Exit from the offices of some politicians.
