November 01, 2023 (MLN): The strength of the US economy, despite a significant rate hiking cycle, appears to have convinced many market participants to embrace a kind of ‘anti-economics’, the idea that significantly higher rates can quell inflation without harming growth, as per the latest report by Fidelity International.

The report discusses key insights from global macroeconomics, focusing on traditional macroeconomics and anti-economics strategies.

Central bankers, burned by their flirtation with ‘anti-economics’ in the form of the transitory inflation mistake of 2021, have been at pains to stress that this time they are sticking to traditional economics.

As a result, they have consistently signaled that weaker macro outcomes, particularly relating to the labor market, are necessary to get inflation under control.

Fidelity Global Macro & SAA Team believes this thinking is shaping the current “higher for longer” message.

The ongoing strength of the US labor market, as evidenced by the September non-farm payrolls report, and the potential for recently rising oil prices to add to inflationary pressures as a result of conflict in Israel and Palestine, are among the factors likely to keep the Federal Reserve hawkish.

They further believe that the gravity of restrictive interest rates will eventually have its intended effect on growth and the labor market, meaning that the US will enter a recession in the next 6-12 months.

The situation has been complicated by the delay in the transmission of higher rates into the real economy in the US.

However, in Europe, particularly in the euro area, higher interest rates are passing into the real economy, solidifying our conviction that Europe will fall into a recession over the coming quarters.

In China, policymakers are fighting traditional economics. While a severe negative growth shock remains unlikely, structural problems with the property sector and local government finances will weigh on economic activity and mean that stimulus will be incremental and targeted.

Finally, Japan has been living in an ‘anti-economics’ world for some time. While interest rates cannot remain negative indefinitely, contrary to market expectations, it is expected that the Bank of Japan will wait until the shunto wage negotiations next year before making major changes to interest rates.

That said, an overshoot in US yields may change the trade-offs for the central bank, particularly as it relates to YCC.

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Posted on: 2023-11-01T13:31:30+05:00