Banca March | Sometimes, when the sun’s rays hit the sea water and there is a big difference in temperature, an optical illusion takes place which creates visual effects that can lead us to think that a boat is capable of “flying” several metres above the horizon. This effect, a mirage, is called Fata Morgana.
Is this effusive start to 2023, in which global stock markets are up more than 7% and bonds have accumulated their highest appreciation since 1974, a mirage? After going through the most severe inflationary process and the subsequent largest withdrawal of Central Bank stimulus in the last 50 years, will it be possible to avoid recession and achieve a soft landing for the economy?
Certainly, inflation is starting to take a breather and the news is progressively better. The moderation in prices that started in June in the US – headline rate of 9.1% compared to 6.5% now – has been followed by the core rate – now at 5.7%. In Europe, the reduction is slower – the latest figure is 9.2% – but we have now had two months of deceleration.
This brings us closer to the end of interest rates by the monetary authorities.
These two factors and the absence of a drastic deterioration in the macro economy are generating an “illusion”: the US GDP closed Q4 with a rise of 2.9%, Europe is suffering an abnormally warm winter that is allowing it to keep gas reserves high and China is reopening its economy.
For the time being, the markets prefer to ignore that the greatest risk for 2023 lies in overestimating economic growth and that, in the past, Central Banks have hardly succeeded in stretching cycles after concluding interest rate hikes. It was only possible in 1995 and 1984, 22% of the time. It is normal for interest rate pauses to be followed by the first interest rate cuts – about 5 months later on average. On most occasions, the interest rate cut is usually a good prelude to a recession – which historically has been between two and 14 months later.
