The inflation data published by the United States this Wednesday fits with expectations and, for many analysts, cements the Fed’s 25 basis point rate cut next week. However, there are experts who insist that Markets are closing their eyes to the possibility that inflationary pressures will re-emergeand force the Federal Reserve to stop a rate cut that, in itself, is going to be much lower than what was expected a few months ago. Already in November, the fund managers surveyed by BofA emphasized the inflationary risk, and rank it as the main threat hanging over the market at the moment. Now, the US bank’s strategists warn of the complacency in which the market is mired with the risk of a new rise in inflation.
The endurance of the US economy in 2024 is the origin of the warning that many analysts are giving about inflation. At the beginning of the year, the base scenario contemplated was that the slowdown in growth and employment in the United States would force the Fed to begin an aggressive rate cut, but, as the months went by, it gradually became clear that this was not going to happen.
The start of the rate cut began in the last quarter, and at the end of the year expectations of rate cuts have been greatly reduced compared to what investors had discounted a few months before. Now it is only expected that there will be 3 rate cuts of 25 basis points until June 2025, a scenario that, together with the possibility that inflation will pick up again, means that the stock markets have discounted too much.
“The market is undervaluing the risk of inflation,” explain financial derivatives strategists at Bank of America. “Now the CPI is much more important,” they point out. And the CPI, although it has not caused any scares this week, does not confirm that the relaxation of the price increase is occurring. Inflation has become entrenched, and its resistance to falling towards the 2% target maintained by the Federal Reserve is putting the stock market in danger.
We must not forget that, with the current high valuations that the US stock market maintains, listed companies need support to be able to maintain the increases that have been seen this year, and one of the main allies they have to do so is the stimuli. of the Federal Reserve. If these do not arrive, in the form of rate cuts, or arrive less strongly than expected, the possibility of episodes of volatility in US equities cannot be ruled out. In fact, after this Wednesday’s inflation data, the US stock market has taken a new upward leap, which confirms the importance of the Fed’s monetary policy on the country’s variable income.
Loretta Mester, former president of the Cleveland Fed, has also spoken about the inflation data, and has issued a warning for the year 2025: “I think the Fed can be calm and lower rates by 25 basis points in December; markets are prepared for it, however, they already have to be thinking about next year, because. “It is true that there are signs that the progress of falling inflation growth has stalled a bit.”Mester pointed out.
In the latest survey of managers launched by Bank of America, last November, respondents gave an important, and worrying, turn for the stock markets: for the first time this year, managers believe that inflation will be higher in 12 months than the current one, which would prevent the Fed from achieving its objective at the end of 2025, and complicates the scenario for the following year. In fact, Respondents also highlighted inflation, again, as the main danger for world marketsand its expectations that it will increase are the highest that have been seen since 2021.
The inflationary impact of Donald Trump
The return of Donald Trump to the White House next January is another stone on the Fed’s path to lowering interest rates. If inflation was already resisting falling before the elections, the victory of the Republican candidate, and his economic program, are another source of inflationary danger. “The possibility of fewer obstacles to a new fiscal expansion and an increase in import tariffs increases the risks associated with higher inflation in the United States,” says Naomi Fink, chief global strategist at Nikko AM.
Opinions in this sense are repeated: “The global growth outlook for 2025 remains positive, at approximately 3.2%, supported by the reflationary policies that are taking shape in the United States after Trump’s victory,” says Michaël Lok, chief investment officer of UBP bank.
“The resounding victory of the Republicans in November has changed the economic outlook for 2025,” explains Salman Ahmed, global head of macroeconomics and asset allocation at Fidelity. “The soft landing scenario in the US that we confidently maintained as a working hypothesis for most of 2024 should give way to reflation as we move into 2025,” he highlights. “Growth-supporting policies, backed by further easing of budget policy, should push inflation higher”confirms Ahmed.
For her part, Tiffany Wilding, an economist at Pimco in the US, confirms after this Wednesday’s inflation reading that “it is possible that the Fed will apply another rate cut of 25 basis points next week, while revising its forecast upwards.” rate path, preparing for a slower pace of cuts next year,” he points out.
The stock market, especially the US one, will have to price in this new rate scenario, with less aggressive cuts, if it materializes. And that, at the valuation levels it is at now, can generate new episodes of volatility in the coming months.
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