Investment Institute
Viewpoint Chief Economist

Hawks don’t Hibernate


Key points:

  • The Fed spoke even more clearly, but the market continues to price rate cuts next year.
  • The ECB’s hawkish turn stunned the market and adds to the downside risks to the European economy and raises questions on fragmentation.

We wish our readers a great festive season – Macrocast is taking a break and will come back on 9 January 2023


We’ve had quite an eventful week on the monetary policy front for this last Macrocast of the year, and this fits quite nicely in our general narrative for next year. Indeed, for us 2023 is likely to be the “mirror image” of 2022. Faster, broader, and more persistent inflation has defined 2022, but with remarkable resilience of the real economy. Conversely, we expect a significant disinflation for 2023, but with a heavy toll on activity, largely because for the first time this century, central banks on both sides of the Atlantic are not trying to accommodate the slowdown. Quite the opposite, they are ready to engineer it, as a painful but necessary condition to get inflation back under control

True, the new Fed’s forecasts are still consistent with only a very shallow recession in 2023 “at worse”, but as we expected the new median terminal rate in the dot plot suggests the FOMC is ready to go very deep into restriction, and stay there for long, to get inflation back under control. Collectively, investors are still not listening though, as forwards continue to price a good 50 bps worth of cuts in the second half of next year. Even if we agree that some tangible signs of disinflation are now appearing in the US, this creates some uncomfortably large space for disappointment in the markets next year.

Meanwhile, the ECB gave us a proper “hawkish festival”. We now expect a terminal rate at 3.25%, well into restrictive territory, with risks tilted to the upside. It is tempting to read last week’s ECB communication as an adaptation to the Fed’s own hawkishness the previous day, with a desire to avoid a depreciation in the euro exchange rate which would impair the European disinflation.  This is understandable, but it feeds into the “race to the top” setup lamented by M. Obstfeld a few months ago, which may ultimately bring about an excessive degree of aggregate monetary tightening in the global economy. Besides, with this hawkish tilt, beyond the fact it is adding to the already dauting headwinds blowing against the European economy, the ECB is taking risks with fragmentation in the Euro area. The ECB has given itself some space to recalibrate QT next June. This is wise but may not suffice.  

Related Articles

Viewpoint Chief Economist

One Week at a Time

Viewpoint Chief Economist

Draghi Captures the Zeitgeist

Viewpoint Chief Economist

Zoom on the Boom

    Disclaimer

    This website is published by AXA Investment Managers Australia Ltd (ABN 47 107 346 841 AFSL 273320) (“AXA IM Australia”) and is intended only for professional investors, sophisticated investors and wholesale clients as defined in the Corporations Act 2001 (Cth).

    This publication is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    Market commentary on the website has been prepared for general informational purposes by the authors, who are part of AXA Investment Managers. This market commentary reflects the views of the authors, and statements in it may differ from the views of others in AXA Investment Managers.

    Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

    All investment involves risk , including the loss of capital. The value of investments and the income from them can fluctuate and investors may not get back the amount originally invested.