Global Investment Views - November 2022

Fed pivot is not around the corner

Central banks (CBs) are trying to work out how far they should go in terms of their aggressive tightening talk. We see four main factors to consider when assessing whether we will see pivots from CBs: (1) The still strong job market does not support a shift in stance from the Fed. Signs of some moderation are emerging in wage growth, but this remains above pre-crisis trends, though decelerating sequentially; (2) Inflation is persistent and challenging. While the peak in US inflation is likely behind us, recent data confirm that core inflation remains sticky. Goods inflation is falling, while the services inflation print came in at a 40-year high; (3) Sovereign debt sustainability is under scrutiny, together with the functioning of markets. Slowing economic growth would require a fiscal push, especially in Europe, at a time of rising interest rates. Questions over long-term debt sustainability come at a time when markets are clearly addicted to CB liquidity. This has become the key to supporting market functioning and the UK is an example that shows how miscalibrated fiscal and monetary policies can affect market functioning and force a central bank to act; and (4) Financial conditions are tight, but could become even tighter as the risk of the Fed being forced to overshoot remains high.