André Thormann’s Post

Markets think inflation will be too high for the next 20 years 👩🎓 This is the key takeaway in a new blog post by Jesper Rangvid from Copenhagen Business School From current rates on nominal and real bonds, we can infer expected real interest and inflation rates. Markets anticipate that real interest rates will remain slightly higher than 2% for the foreseeable future. They also expect inflation to exceed the 2% target for the next 20 years. The latter poses a challenge for central banks. The market anticipates that U.S. inflation will average 2.3% per year over the next decade. Between 2034 and 2044, expectations are even higher, at 2.65%. Consequently, the market lacks confidence in the Fed’s ability to steer inflation back to its 2% target over the next two decades. Given the significance of inflation expectations for monetary policy and the inflationary environment, this poses a challenge for the Fed.

Supply shocks were the main culprit in inflation over the past few years but that demand probably played a supporting role, especially in the US. To the extent that demand contributed to the surge in inflation, higher policy rates were necessary. In addition, higher inflation directly reduces real interest rates, so that higher policy rates are needed just to keep real interest rates from falling. Moreover, central banks needed to be seen responding to inflation in order to prevent expectations of higher inflation from becoming entrenched in wage and price setting behavior.

On ECB vs. US Fed: Why does the ECB have to follow the Fed's interest rate cycle? At 2.4%, inflation in the Eurozone was slightly better than expected in March. The trend is therefore continuing to decline. If the ECB actually has to wait for the Fed - in completely different economic conditions - it will never achieve its own autonomy, independence and credibility in the markets. In other words, the ECB must - based on its data - have a European mind of its own and be authentic! See slides on the different developments of GDP, inflation and key interest rates in the Eurozone and the USA. Europäische Zentralbank Federal Reserve Board #inflation #interestrates Erste Group Bank AG #believeinyourself

After a period of high inflation and aggressive rate hikes, central banks now face rapidly falling inflation rates, especially in Europe, Asia, and North America, signaling weakening demand and a potential prolonged downturn. Inflation has dropped below 2% in countries like Germany, France, and Switzerland, with high-inflation regions like India and South Africa also seeing sharp declines. Central banks, including the ECB and the Bank of Canada, are considering faster rate cuts to address this sudden disinflation, reflecting growing concerns about shrinking consumer demand and economic slowdown. Undershooting, which is now more a sign of economic deterioration than stability. As it indicates persistent weakness in demand and a shrinking economy. This global downturn is synchronized, with major economies like China launching large-scale stimulus to combat falling demand, while South Korea and India are seeing inflation rates dip below 4% for the first time in years. .  Today's disinflation resembles the silent depression of the 2010s, where despite aggressive monetary easing, economies struggled with low growth, weak job creation, and sluggish recovery. Unlike the 1990s, when disinflation occurred with robust growth, current disinflation is tied to fundamental economic weakness. Bond markets, which have been signaling a recession since 2023, reflect this shift. The rally in bonds, driven by expectations of lower growth and inflation, suggests that investors have long anticipated this phase, while central banks are only now recognizing its depth.As inflation continues to drop and bond yields and interest rate swap markets indicate further economic slowdown, central banks must balance rate cuts with the challenge of stimulating demand. The fear is that we are entering a period , where rate cuts alone were insufficient to spark meaningful growth. This signals a difficult road ahead, with global demand contraction and potential long-term stagnation threatening economic recovery

As we transition from a quiet end to August into early September, markets are grappling with the effects of softening economic data, particularly in developed economies like the U.S., Germany, and the UK. The focus has notably shifted from inflationary concerns, which seem more contained, to worries about economic growth and labour market dynamics. Central banks, including the Federal Reserve, are signalling a balanced approach between inflation control and labour market stability. Last Friday’s CPI data release has actually removed the probability of a 50bps cut this week. Outlook: BBG, X.com @Credit_Junk Market Data from: 09/09/2024

🇪🇺 ECB Update: Lagarde Signals Increased Confidence in Meeting Inflation Target Key developments from ECB President Christine Lagarde's recent statement: Inflation Outlook: • Eurozone inflation expected to drop below 2% target for the first time since mid-2021 • Germany's inflation at 1.8%, Italy's at 0.8% in September • Energy costs and cooling services prices driving the decline ECB's Stance: • Increased confidence that inflation will return to target "in a timely manner" • This confidence will be considered in the October 17th monetary policy meeting Economic Indicators: • Recent business surveys suggest a decline in output for September • Measures of confidence remain subdued • Wage growth is "beginning to decelerate" Potential Policy Implications: • Expectations growing for a rate cut at the October meeting • ECB previously signaled a cautious approach, but recent data and moves by other central banks (Fed, Sweden, Switzerland) may influence decisions Global Context: • Fed's recent 0.5 percentage point cut contrasts with ECB's more modest steps • Switzerland cut rates for third straight policy meeting Key quote: "The fight against inflation is progressing" - Christine Lagarde https://lnkd.in/eG7ZdUzv #ECB #Inflation #MonetaryPolicy #EuropeanEconomy #GlobalMarkets Source: Wall Street Journal, September 30, 2024

This week, important central banks in countries around the world decided on their policy rates. After Fed in US, managed to reduce the inflation, which had reached almost double digit in mid 2022, to almost 3% by increasing their interest rates, it continued with its decision to keep the interest rate constant, considering the economic activity and higher than above inflation expectations. Although there is still a strong expectation of a reduction in interest rates this year, the timing of the expectation that this reduction may occur is shifting from June to September, as the final timing will be determined according to the incoming economic activity and inflation results. Likewise, the British Central Bank gave a similar example by keeping the policy rate constant today. The Bank of Japan, on the other hand, struggling with deflation while other countries were struggling with inflation, managed to create a small inflation at the end of the monetary easing policy they implemented in last 17 years, they abandoned the negative interest policy and increased interest rates. I hope these examples would be followed by Central banks in countries struggling with high inflation to help their society coping with inflation in everyday lives. I am going to talk about this decisioning mechanism in the new edition of my newsletter The Risk management trail The Good Bad and Ugly... Please Subscribe on LinkedIn https://lnkd.in/d2seRcKv

Eurozone inflation fell to 1.8% last month, dropping below the European Central Bank’s target for the first time in three years, offering positive news for policymakers. The preliminary September figures for annual consumer inflation, released on Tuesday, aligned with economists' expectations from a Reuters poll and marked a decrease from 2.2% in August. Markets are now anticipating that the ECB will lower its benchmark interest rate by a quarter point to 3.25% at its next meeting on October 17, following previous rate cuts in June and September.

Following the past week’s central bank meetings, the attention turns to economic releases in the week ahead with US core PCE, personal income and spending figures among noteworthy key data releases. This is in addition to inflation readings for France and Spain and final Q4 GDP readings from the US and UK. Besides which, the Bank of Japan’s post-meeting summary will also be watched alongside Japanese retail sales and industrial production numbers. Preview the week with us here: https://ow.ly/Q2m150QZiQI

It’s a crucial week ahead for central banks that oversee 40% of the world’s gross domestic product. There’s intense speculation that the Bank of Japan will raise interest rates for the first time since 2007, ending the world’s last negative rate. In the US, policymakers are expected to hold steady until it’s clear that price surges are contained, as the glide path to a soft landing experiences some turbulence. Moreover, a slight uptick in inflation revealed by data this week may mean the Federal Reserve will stick with its mantra of patience longer than previously expected. Economists surveyed by Bloomberg now forecast three US interest-rate cuts this year and four in 2025. The UK and euro-zone also look set to begin cutting rates later in 2024 as inflation there comes under control.