REAL INDICATORS
What Keynes called "irreducible uncertainty” is investing i stock and bond markets, with odds staggering like a crew of drunken sailors. When the unknowns are formidable – recession, war, inflation, gas, China, Taiwan… – it's easy to go from seeing the glass as half full to half empty, and vice versa, with every flurry of data.
But theroller coaster (we don't want to call it a "roller coaster") unwinds along the descending slope of a recession which is no longer possible to avoid. There can be no counter to it monetary policy which, as mentioned last month, is part of the problem and not part of the solution. In the sense that it is itself bearer of restrictive impulses, by resolution (by design, again quoting Keynes) and not by mistake (by accident), aiming to rein in inflation precisely through the weakening of the economy. Even if there are faint signs that the restriction may become less severe than feared, these signals are the very mirror of the end of the advance and the engagement of reverse gear.
It would stay there budgetary policy, which – we had hoped for last month – needs, in Europe, a common debt instrument which, as in the case of the pandemic, can make the funds available to countries to face another pan-European challenge, that of price increases of energy. But here too i well-meaning Germani, supported by the usual suspects, turned a deaf ear and refused solidarity. We'll see if the proposal to insert the RePower EU within NextGenEU (and what is more vital for future generations than the way of producing and using energy?) will have legs… And in any case, EconFin has correctly agreed that only soothing measures that are not inflationary (almost an oxymoron).
Stay there industrial policy: accelerate towards the energy transition and renewables and acquire infrastructures that avoid dependence on a single source and a single supplier. But the effects are not immediate. In short, economic policy can do little to support the economy.
And the war unknowns they are now more formidable: paradoxically, the successes of the Ukrainians in regaining lost lands make us fear the worst. A Putin with his back against the wall it can get dangerous. The use of nuclear weapons would have deleterious effects on confidence, and the response of the West, even if it were not military, but economic (there is still a lot of room for sanctions) could not fail to reverberate on the Western economy itself. Russia would become a pariah among nations and all trade between it, the US and Europe would cease (in the first 6 months of this year those trades still totaled $183 billion). Of course, all of this it would harm both the sanctioned and the sanctioners (although the effect would be much more serious for the former), but the seriousness of resorting to atomic bombs is worth a sacrifice and rationing.
At the time of Covid, the recovery after the pandemic was faster and stronger than expected. But it is not possible to speculate on the recovery after this recession. “Irreducible uncertainty” about the war in Ukraine prevents us from doing this.
Recession that is now underway. As he asserts without ifs and buts output component of the PMI survey: in September it was for the second month in contraction area, very marked in manufacturing, while services remain hanging by the tip of the fingers on the edge of the abyss. The fact, then, that the order component whether it is itself in a recessive zone, it announces the sad news that the next few months will also be characterized by a decline in production.
Except for the very peculiar situation of thebacklog of orders themselves, which causes firms to continue to hire and produce to clear this backlog, whenever supply bottlenecks allow. Many, however, stop producing because the marginal cost it is driven by high-energy beyond marginal-revenue, so that the more they produced the more they would lose.
In other words, stay one phone recession, to use an adjective that was coined in 1939 to define a "strange war", in which declarations of war were delivered to the ambassadors but for many months not a single shot was fired. Then the blows came, and how they did. Surely the present recession is strange why very differentiated. is in recessionWestern Europe, brought in by Germany, but now also by Italy. Which, according to the estimates and forecasts of the same government, records declines in GDP in at least three consecutive quarters: the last, the current and the first of 2023.
I funds of the PNRR, with the sharp increase in public investment, are the lifeboat, and not only at this juncture, because by raising the productive potential and undoing quite a few snares and snares, thanks to the reforms, they will make the weight of the public debt bearable. Therefore reviving a slogan from other times, coined in 1947 by comrade Roberto Mieville: damn who quits! Or just questions the timing of implementation.
La France it still floats, on the surface of the water. For the Spain the end of the tourist season is redde rationem of the harsh environment for the industry. In China it's about a growth recession, i.e. a sharp slowdown, with growth below potential (hero who knows how to estimate). The USAare, in fact, already statistically in a recession, having recorded two successive declines in GDP in the first two quarters of 2022. But it is a recession even stranger than the others, because companies continue to hire hands down: 2,6 million workers added in the first half of 2022, against an average of 1,2 million in the corresponding periods of the pre-pandemic five-year period. And in the third quarter the pace is similar: a job market that more hot can not be done.
On the other hand, even if all the unemployed went to cover the vacancies, US companies would still lack four million workers. It is still not clear what happened, the fact is that the Beveridge curve, which relates the unemployment rate to the rate of vacancy, has shifted sharply to the upper right; the Great resignation also means this. Translated in a nutshell: to have more workers you need to attract them with significant amounts salary increases. But this generates inflationary pressure. Unless the curve returns to its place, but it's still early to tell if and when that will happen.
INFLATION
Il peak is passing, they said during the long and hard days of the lockdown. And some joker (style Vernacular) posted on social media the video of a pickaxe passing in front, on top of a skateboard. The expression was dusted off at the end of last spring with regard to inflation, and we would like to put the same footage back on social media. And it would be even more appropriate, because theincrease of prices is picking the purchasing power of households and the margins of businesses. And by dint of picking he puts an end to the recovery, turning it into a recession (see above).
Now, as a point of analysis, the singular cannot be used but the plural should be used: the woodpeckers. To distinguish price dynamics in various jurisdictions. Definitely in the USA the peak of annual change in consumer prices it was touched in June; while inEurozone perhaps it is still to be achieved; and also in Japan (thanks to a mega-devaluation of the yen).
But what about another inflationary yardstick, that of cost of labor? Wage dynamics appear to have peaked in July in America. On this side of the Atlantic the statistics are more lacking, but the anecdotal impression is that it is yet to come.
Finally, a crucial aspect is how long it takes for the peak to pass, i.e. back to the fateful 2%. Because, as has been said several times, the longer a phenomenon lasts, the more durable it becomes, incorporating itself into expectations and behaviors. Hence the haste of the central banks to pass it quickly. But here the news still does not seem reassuring: the surveys of companies say that in September there was one setback in the retreat of price increases, both for their inputs and for the price lists they apply. Price increases that remain historically large. Adda pass 'o piccu!
RATES AND CURRENCIES
The crucial question about rates it's this one: for how long and with what intensity will continue what the central banks call (modestly, but with some reason) the 'normalization' of monetary policy? Until recently there seemed to be no doubts about the determination of the Fed and ECB in continuing the stringent series of increases in key interest rates. Some punctual data have come to to put in doubt that determination: in America i vacancies – an important finding, given that a tight labor market is a key ingredient in the price/wage transmission that would trigger lasting inflation – they have decreased in August by more than a million. By itself, this data would not bother the Fed much, since Powell he would like more confirmation before slowing down the rise in interest rates. And, even if the monetary policyultimately it depends on the data, the determination of the central banks in push inflation back to the coveted 2% it leaves no room for repentance, more or less industrious.
Already in AustraliaFor example, the Reserve Bank surprised analysts with a hike (25 basis points) half of what was expected. And the ECBAlthough inflation in the Eurozone has hit 10%, it too will have to take into consideration the ongoing recession.
More generally, it is worth noting that often the total is more than the sum of the parts: that is to say, a monetary tightening acted simultaneously by the largest central banks affects more, on the living flesh of the international economy, than would result from single and not simultaneous increases. Among the transmission channels, the dollar (see below), and the strength of the greenback it complicates life – between higher inflation and greater weight of debts in dollars – to the rest of the world.
I market rates, which have very sensitive antennas, signal – see graph – that we are close (hopefully, we have already been disappointed once) to the peak. But the increases hurt i btp, squeezed between the physio-pathological penalization of high-debt countries, and the uncertainties about the policy of the new government being formed. These uncertainties also present another risk for BTPs: the risk of a downgrade of the credit rating of the Republic; although one should ask whether i rating, which seem to apply 'corporate' criteria to sovereign countries, make sense in today's complicated climates.
One consolation lies in the fact that the banking system, as noted by the European super-regulator Andrea Enria, he is in good health in Italy and in Europe, thanks, paradoxically, to interest rate increases, which give back profitability to banks. It may be regretted that floating rate borrowers suffer while the banks enjoy, but it must also be remembered that the health of the financial system is important when the economy is threatened. Of course, the recession will also lead to a increase in suffering, but improved balance sheets allow banks to face this risk, especially evident for institutions that were too exposed to companies at risk of increases in the cost of money.
In the field of currencyeuro hasn't had it easy: always on the subject of volatility, we have had various examples of daily moves over 1% and, after falling somewhat below equality with the dollar (reaching 0,959 on 27 September), it settled around 0,98. Many voices have been raised to describe the greenback strength damage. Of course, it would be desirable for commodities to be quoted in SDRs (Special Drawing Rights, a basket currency made up of major currencies). But, until this happens, a strong dollar fuels inflation in the rest of the world, as well as threatening bankruptcy and bankruptcy in many indebted in dollars.
The fundamentals continue to favor the US currency: the long-term real rate differential (T-Bond minus Bund), which was negative at the start of the year, is now largely positive. There Fed, traditionally, does not target the dollar exchange rate, but this time it could be different: within the fomc there are those who realize these problems. For the chinese coin, also affected by the strength of the American currency (on 28 September it had reached an exchange rate of 7,20, the highest for five years), there was a partial retracement. But for the China the advantages outweigh the disadvantages: theinflation is under control (2,5% the overall consumer price index, and 0,8% that core) and the weakness of the currency promotes competitiveness and encourage growth.
I stock markets they are the ones that have suffered the most from the volatility mentioned at the beginning, and we have listed the reasons for it. At one time we talked about Greenspan Put, that 'guarantee', that is, that when things go badly on the stock market, the Fed comes to the rescue with rate cuts. A Powell Put, however, it is very unlikely, given that the Fed wants to tighten monetary conditions intended to restrict demand, and a weak stock market helps.
Ma est modus in rebus, and a vertical collapse of Wall Street is in nobody's interest. This has been seen with the Bank of England Put, when the Bank, after the incredible fiasco with the mini-budget of the ineffable Truss-Kwarteng couple, was forced to another Qe to support the gilts, when i pension funds, with regulators asleep at the wheel, had used leverage to fill their bellies with long stocks.
