Monetary policies and market reaction: premature optimism?

Diego Franzin, Head of Portfolio Strategies di Plenisfer Investments SGR

Yesterday, the European Central Bank announced a new 50 basis point increase in interest rates to 3%. President Lagarde stated that the increases will continue 'significantly and steadily', anticipating that there will be a new 50 basis point increase in March.

The ECB reiterated that its aim is to reduce inflation, which, although it fell to 8.5% in January from 9.2% in December, still appears too high and could be further fuelled by the new fiscal policies that European governments will implement to combat high energy prices.

Before ECB, US Central Bank increased rates of 25 basis point on Wednesday, bringing the cost of money to 4.5%, the highest level since September 2007. 

Both central banks emphasised that they will continue to fight inflation with the goal of bringing it back to 2% and that rates are unlikely to start falling this year. 

Despite these announcements, the markets reacted positively, bucking the trend of the past. What has changed?

The central bank presidents reiterated that monetary policy decisions will be "guided by the data" on the economy and inflation: compared to last December, inflation and economy are showing the first signs of a slight slowdown. The market therefore interpreted the central bankers' statements as a change in rhetoric and reacted with short-term optimism: the market seems to be confident on monetary tightening could slow down or the “pivot” could be reached as early as the second half of the year, if these trends will continue in 2023.

In our view, this reversal is unlikely to occur in 2023. 

Inflation moves in waves and we believe that all secular inflationary factors remain: rising geopolitical conflicts, demographics, low productivity, structural scarcity of raw materials and energy, etc.  In this context, the reopening of China is certainly an additional inflationary element. But above all, real interest rates, when measured against actual inflation, are still negative.

At Plenisfer, we therefore believe it is premature to lower our guard in the fight against inflation: to beat it, it would be necessary to achieve positive real rates, a goal that would require a far greater dose of monetary tightening administered for longer than hitherto.

Disclaimer

This analysis has been prepared for informational purposes only. This document does not constitute an offer or invitation to sell or buy any securities or any business or business described herein and does not form the basis of any contract. The above information should not be used for any purpose. Plenisfer Investments SGR S.p.A. has not independently verified any of the information and does not release. 

No representations or warranties, express or implied, as to the accuracy or completeness of the information contained herein and the same (including their respective directors, partners, employees or consultants or any other person) shall not, to the extent permitted by law, have any liability for the information contained herein or for any omissions arising therefrom or for any reliance that either party may place on such information.  information. Plenisfer Investments SGR S.p.A. assumes no obligation to provide the recipient of this document with access to further information or to update or correct the information. Neither the receipt of such information by any person, nor the information contained in this document constitutes, or will be considered as constituting, the provision of investment advice by Plenisfer Investments SGR S.p.A. to such subjects. Under no circumstances should Plenisfer Investments SGR S.p.A. and its shareholders and subsidiaries or their employees be directly contacted in relation to this information