Crude oil fell again yesterday to its weakest point since the summer, and thus the FTSE 100 is struggling this morning, falling slightly into the red. Although a few different types of stocks are dragging down the average amid several earnings reports this morning.
The Dax has opened strongly but is off the intra-day week highs while US stocks rallied for an eighth straight day – the S&P 500 extending its longest win streak in two years. Oversold stocks running into what the market thinks is a Federal Reserve pivot creates strong momentum for buyers. Treasury yields close to the lows with the US 10-year at a little above 4.5 per cent, the dollar firmer but well off yesterday’s highs. China’s still in deflation territory this morning.
Meanwhile over on Threadneedle Street, Bank of England governor Andrew Bailey said it’s “too early” to discuss rate cuts. He joined other central bankers on the ‘pause’ and ‘higher for longer’ script. Only a couple of days ago his own chief economist, Huw Pill, said markets were about right to price in cuts in the middle of next year. Oops...but loose talk is par for the course.
The question is of course how long is longer and do they tolerate higher inflation? I continue to believe central banks will be forced to accept higher inflation, but that doesn’t mean they are about to cut rates and allow inflation to take off again. They are rightly afraid of loosening prematurely just as they get something of a grip on inflation.
Others have joined in the party: Bundesbank head Joachim Nagel said: “The ‘last mile’ before we reach our inflation target may well be the hardest,” echoing comments from, well, just about everyone in recent months. European Central Bank head Christine Lagarde and Fed boss Jerome Powell are due to speak later.
Pierre Wunsch, a member of the ECB governing council and the Belgian central bank chief, spoke of the cognitive dissonance that always exists in markets. “We’re set for soft landing in the short term,” he said, adding: “We are entering some form of stagflation.” How can you get both?
It is axiomatic that the market is always full of conflicting beliefs: that’s what makes the market tick. But Wunsch’s comments underscore the dichotomy within central banks and within many market participants – are they too tight while simultaneously not doing enough to bring down inflation? Maybe they are using the wrong tools? Maybe the frameworks are out of date? Maybe, just maybe, the inflationary paradigm has altered. Maybe the fiscal side needs to do less/more depending on your viewpoint.
Wunsch also stressed that it’s too early to make predictions on when rates will fall, but indicated also that the bar for hiking rates again was high. Sentiments shared by colleague Gabriel Makhlouf, who warned it’s way too early to discuss rate cuts. He said “there is huge uncertainty as to what lies ahead. A large part of monetary tightening has yet to be passed through to the financial system and to the economy; and while some risks are fading, new risks are emerging”. Other ECB policymakers voiced similar views that rates will remain high.
The Trader is written by Neil Wilson, chief market analyst at Finalto
