Saturday, June 25

Where is the real risk for the market?

The rise in interest rates is always considered a risk factor to the market. But real risk is in the low employment levels and the changes in monetary policies is a sign of the low expectation of employment, according to Jon Sindreu in The Wall Street Journal.

Just one day after the Federal Reserve indicate that it could raise rates three times next year, the stock markets both in the United Kingdom like in the eurozone they registered new earnings. This was despite the fact that on Thursday, the Bank of england decided to join the Fed and increased loan costs, Meanwhile he European Central Bank left them in historic lows.

Stock market optimism could simply mean that investors consider these policies to be broadly suited to the needs of each economy. After all, a growing economy may face some rate increases and, if the Omicron variant of Covid-19 destructive, officials could easily change course.

“Under the current circumstances, it is highly unlikely that we will increase interest rates in 2022,” said the president of the ECB, Christine Lagarde, and emphasized that high inflation of the eurozone (4.9% in November) is the result of power shortages. This puts the ECB on a divergent trajectory from the other two central banks, which the market expects to aggressively tighten policy next year. “These economies are in two different stages of the cycle, given the greater amount of fiscal stimulus implemented in the United States and the low wage growth in the eurozone,” added Lagarde.

What investors may not be realizing, however, is that the mere resurgence of inflation, whether transitory or not, is causing central bankers to are much less sympathetic to full employment than before.

What did the BOE do about it?

Last month, the BOE Governor Andrew Bailey, conditioned the rate increases on a next labor market report which would purportedly clarify whether the end of the UK licensing program in September had led to higher unemployment. When the numbers came in, they showed little deterioration, opening the door for Thursday’s move.

However, as he points out Tomas Hirst, European Credit Strategist at CreditSightsIt is difficult to give full credit to the figures that suggest that the 1 million people who were laid off just two months ago instantly found full-time jobs. Meanwhile, polls of purchasing managers suggest that the UK economy is already taking the hit from Omicron. As a result, traders expected more caution from the BOE and were once again caught off guard by its actions.

Similarly, there is a danger that the US labor market make policy makers forget that the share of working age people in employment remains below pre-Covid levels, as is also the case in the UK and eurozone. Some economists are pushing the idea that these economies are already in full employment, because the pandemic has brought deep-seated changes that will make some people not want to return to the workforce. But this is eerily similar to the views adopted after the 2008 crisis, which eventually led to a weak and slow recovery of the labor market. This is what central banks had committed to correcting with their updated policy frameworks.

Job seekers are more likely to simply need time to match up with employers and pre-pandemic employment rates can be met or exceeded. However, central banks have started their tightening cycle before this happens, even as new stresses from Covid-19 add to uncertainty.

The current rate increases are not particularly worrisome. Just as low inflation continued to raise the level of what is considered full employment, high inflation may continue to lower it.

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