Fine music lovers will have recognized the nod to Richard Gotainer's humorous song. In these few lines, we will not deal with the attachment, sometimes excessive, of certain people to their animal companion, but that of certain managers with the belief, excessive, in the famous "dovish pivot" of the FED which we are dealing with. Elsewhere last week to recall that "one thing is certain, the current degree of this inflection [that in the monetary policy of the FED] is not yet enough to speak of a real dovish pivot".
Not only the Fed, but also the ECB and the Bank of England gave investors a clear reality check at their monetary policy meeting last week: if the pace and magnitude of policy rate hikes will, as expected, be less (rise of 50 bps for the three central banks at their last meeting instead of the previous 75 bps), the fight against inflation is far from won and the key rates will continue to be raised with certainly a maintenance at a level high for a longer time than bought by the market. It was enough to resuscitate the specter of the error of monetary policy, namely the fact of going too far in hawkish policy at the risk of causing a more painful landing than announced for the economy. US equity markets corrected with a decline of -2.1% over the week for the S&P 500. Across the Atlantic, the Euro Stoxx 50 fell -3.5%. While the US 10-year did not overreact, with even a slight dip over the week due to the existence of a clearer roadmap for rates in the United States (rise of 75 bps in Fed Funds to reach 5.50% at the end of 2023) than on the Old Continent, the same is not true of the Bund, which rose above 2% (+22 bps over the week to end at 2.15% on Friday) .
The message from central banks on both sides of the Atlantic is clear at the end of the year. It's about saying to the financial markets, "Don't be too optimistic and think that our monetary policy is essentially driven by the consumer price index." In other words, it is certainly the employment indicators that will further guide central bankers in order to measure the latitude in their monetary tightening action. In Europe, beyond the subject of the rise in interest rates, the question of the reduction of the ECB's balance sheet (gradual reduction in reinvestments from March 2023) is very sensitive because its impact in particular on the volatility of the sovereign debt of the so-called peripheral countries such as Italy deserve attention (the Italy-Germany spread increased by +24 bps over the week).
Thus, between the displayed intransigence of Jérôme Powell recalling the imperative of a decline in inflation below the medium-term objective of 2% (restrictive tone confirmed by the forecasts of key rates by the members of the Fed, at knowing the "dots"; see the graph of the week) and the determination displayed by Christine Lagarde (recalling that "compared to the FED, we have more ground to cover"), the tone is set. How, however, not to ask the question of the risk of error in monetary policy? Indeed, Christine Lagarde argued that "the recession would be short and moderate" (the rebound of the preliminary PMI indices for December in the euro zone certainly seems to confirm this trend, reinforced by a relapse in energy prices and the budgetary measures of support; the same applies to the improvement in the business climate in Germany according to the IFO index released today for the month of December: 88.6 for the current month, compared to 86.4 in November and 87.4 for expectations). However, the repeated tightening of the central bankers is likely to create a deeper recession than desired and it is permissible to doubt their ability to anticipate. Let us remember the dialectic of Madame Lagarde with a temporary inflation, which lasts, then that we announce how coming from nowhere. How, moreover, can we believe with closed eyes in the soft landing scenario emerging from the updated economic projections of the FED at the last FOMC (real GDP growth admittedly revised downwards but with an unchanged rate of activity of 0.5%; inflation being curbed with a PCE index expected at 3.1% at the end of 2023).
In our last meeting on Monday, we recalled the three "little pivots" that had been bought by the market during the recent bear market rally ("dovish pivot" of the Fed, far too anticipated by the market in our opinion, "pivot of Xi Jinping" with the end of the zero-Covid policy, which seems credible to us, even if the increase in contaminations in the coming weeks risks slowing down the resumption of activity, and "pivot on the Russian- Ukrainian" with the major difficulties encountered
