Financial conditions have tightened during the past month. Positive economic indicators and a more circumspect approach from central banks, particularly in the US, have delayed any plans for an early interest rate decrease, which is why. In line with what we expected, the European Central Bank (ECB), Riksbank, and Norges Bank all increased interest rates during their September meetings, indicating that their recent round of rate hikes is likely coming to a stop. In contrast, the Bank of England stunned everyone by holding interest rates steady despite August’s lower-than-anticipated inflation numbers. It was widely predicted that the Federal Reserve would decide to stop raising interest rates.
We anticipate that economic expansion continues, even though many central banks continue to say they would hike rates higher if economic conditions warrant it.
Indicators of the economy are still weak, but there are no indications of a coming recession, which is consistent with our most recent Nordic Outlook report from September 5. The euro area’s September flash HICP, which displays a heartening decline in core inflation, is one example of how inflation figures have generally been lower. The Fed’s favoured indicator of underlying price pressures, the Core PCE, only increased by 0.1% month over month in August after being seasonally adjusted.
The risk environment for central banks has become more balanced. On the one hand, positive data, constrained labour markets, and rising real income increase confidence in the possibility of a gentle landing. On the other side, tightening global financial conditions are a result of rising rates, a stronger USD, higher oil prices, and a decline in risk sentiment. The real monetary policy stance tightens as inflation and inflation expectations continue to decline.
Rising oil prices pose a dilemma for policymakers, especially in light of a probable decline in demand. Although inflation has a clear upside risk, this could be countered by a reduction in consumers’ purchasing power. By year’s end, we expect Brent prices to revert to roughly USD 85 per barrel because we see the price increase as mostly being driven by supply.
The majority of central banks have probably achieved their maximum policy rates, which has caused yield curves to become steeper due to increasing long-term bond yields. Expectations of persistently high rates and a rise in term premiums are partially to blame for this. The uncertain fiscal policy outlook is one element causing risks to increase. Governments are being forced to think about cutting spending to stop the growth of their debt-to-GDP ratios as a result of slower inflation, weaker real growth, and higher interest rates. On the other hand, there is still push for lax fiscal policy in many nations. The budget deficit for the following year has lately increased in France and Italy, and the US Treasury intends to expand the issue of longer-dated notes in Q4.
Despite the fact that China has received less attention recently in the press, issues in the real estate sector still exist. Concerns were raised in local markets when Evergrande, the company that started the Chinese real estate crisis two years ago, missed a bond repayment in late September. Despite the federal government’s efforts to bolster confidence through additional stimulus measures, leading statistics point to declining consumer growth.
