Stronger Economy opens new regime on the table

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Stronger Economy opens new regime on the table

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In this article you’ll find:

🎯 Franklin Templeton – Is policy not as tight as it should be? 👇

  • STRONGER ECONOMY AND LOWER UNEMPLOYMENT RATE
  • NATURAL RATE IS HIGHER
  • POLICY IS NOT AS TIGHT AS IT SHOULD BE

🎯 BlackRock – New Regime on the table 👇

  • THE TIGHTER MONETARY MEDICINE IS WORKING?
  • WHAT DID RECESSION HAS GONE?
  • 2 IMPORTANT JAPAN UPDATE

Here you can find other articles:

  1. Is Soft Landing Possible Yet? (VIX Update)
  2. Global Markets Update (40-year downtrend broken)
  3. Market Expectations – The work is not finished yet

ENJOY THE ARTICLE

🎯 Franklin Templeton – Is policy not as tight as it should be? 👇

– “FED kept interest rates on hold in its September meeting but went out of its way to signal that the neutral interest rate is likely higher than the central bank has indicated so far, and that policy will have to remain tighter for longer – as I have long maintained.”

STRONGER ECONOMY AND LOWER UNEMPLOYMENT RATE

Economy

“On the macroeconomic outlook, the Fed now envisions a much stronger economy this year and next, with faster growth and lower unemployment.”

– “Gross domestic product (GDP) growth has been revised upwards by over one percentage point for this year, to 2.1%, and by almost half a percentage point for 2024, to 1.5%.”

– “The Fed now sees unemployment at just 3.8% by the end of this year, and only 4.1% in 2024 and 2025 – this compares to an already quite low path of 4.1%, 4.5% and 4.5% in the previous projections.”

– “The inflation path, however, has been left virtually unchanged, with core Personal Consumption Expenditures (PCE) a tad lower this year at 3.7% (from 3.9%), unchanged at 2.5% for next year and close to target by 2025.”

NATURAL RATE IS HIGHER

– “I have been arguing for some time that the natural real rate of interest (the one that would be consistent with target inflation and full employment) is higher than that implied by the 2.5% long-term nominal rate in the Fed’s forecast.”

– “A higher natural rate would be consistent with the stronger growth we’ve been observing, and now acknowledged in the new Fed forecast.”

– “Indeed, Fed Chairman Jerome Powell conceded that the reason why the US economy remains so strong might well be that the natural rate is higher – in other words, that current monetary policy is not actually that restrictive.”

– “Powell emphasized that the natural rate is hard to pin down, and stressed that whether policy is restrictive, “we’ll know it when we see it.” We’re definitely not seeing it yet.”

POLICY IS NOT AS TIGHT AS IT SHOULD BE

Economy

– “The Fed realizes and implicitly acknowledges that policy is not as tight as it should be – or at least, as Powell put it during the press conference, has not been tight for long enough.”

– “This is reflected in robust economic growth and a strong labor market. Inflation has come down but not enough, and with a strong economy and monetary policy that might not yet be sufficiently tight, the risk is that disinflation progress might stall.”

– “To get inflation back to target will require further tightening.”

– “In the Fed’s scenario, this will be achieved by keeping the nominal policy rate high (one more hike this year and at most two cuts next year) so that declining inflation delivers a higher real interest rate.”

🎯 BlackRock – New Regime on the table 👇

THE TIGHTER MONETARY MEDICINE IS WORKING?

– “Rate hikes are weighing on economies. Major central banks are administering the medicine of tighter monetary policy and economies have slowed.”

– “The medicine is still working its way through the system – and effects have varied across regions. PMI data across Europe has shown stagnation.”

– “GDP data suggest activity has held up in the U.S. But we think activity has actually stagnated there as well. That seems to have gone under the radar: a stealth stagnation.”

– “The average of GDP and another official measure of activity, gross domestic income, shows the U.S. economy has flatlined since the end of 2021.”

WHAT DID RECESSION HAS GONE?

Economy

– “The market narrative hasn’t been one of U.S. stagnation though.”

– “One reason: We’ve avoided the short and sharp drop of recession for now. Instead, it’s felt like a rolling effect of hikes rippling through the economy – that may be why the market feels different, too.”

– “The weakness we’re seeing isn’t a normal business cycle slowdown, in our view. Unemployment is still low.”

– “That suggests something structural is at play, so we don’t think a purely cyclical lens applies. We’ve long said we’re in a world shaped by supply – and this is playing out.”

– “We see constraints on supply building over time – especially from a shrinking workforce in the U.S. as the population ages.”

– “Central banks need to keep a lid on growth to avoid resurgent inflation once pandemic-era mismatches unwind. That’s why we see them holding tight, not cutting rates like they did in past slowdowns.”

2 IMPORTANT JAPAN UPDATE

Economy

– “First, the Bank of Japan is seeking to ensure it has got inflation up sustainably to 2%.”

– “Keeping policy unchanged last week suggests it would rather hike too late than risk being too early.”

– “Japanese bond yields have been relatively stable, but we expect a jump as suggested in market pricing with the BOJ loosening its yield cap over time.”

– “Second, Japan is not suffering the same structural downshift in growth – and corporate reforms are taking shape.”

– “We think strong growth can boost earnings and shareholder-friendly actions may keep attracting foreign investors to Japanese equities.”

Join the conversation with your own take on these topics in the comments below.

About the Author

Alessandro is a Financial Markets enthusiastic and he loves learning from articles/papers on many financial topics.

In doing so he shares with you the most interesting charts and comments.

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