the complicated wait

The employment data published last Friday in the United States was surprisingly good. All non-farm payroll data reflect a tight labor market with clear wage pressures

It will be very difficult for the volatile environment in global markets to change in the weeks leading up to the next monetary policy decision by the Federal Reserve in the United States.

Moreover, if the news is good in terms of economic performance, nervousness may grow as investors may anticipate an aggressive Fed even more intensely.

There is a new scenario that most are trying to understand and whose epicenter is the turn to greater restriction by most central banks.

The employment data published last Friday in the United States was surprisingly good. All non-farm payroll data reflects a tight labor market with clear wage pressures.

The information tells us that the US economy was able to create a large number of jobs despite the effect of the Omicron variant. There are signs of still robust growth.

The evidence of an economy that does not lose strength; In other words, the good news immediately translates into greater nervousness regarding the following actions of the Federal Reserve (next meeting of the Committee on Open Markets in March).

A more aggressive Fed is expected. It should not be forgotten that the central bank underestimated the rise in inflation and only in December decided to go after it. Federal funds rate futures are already pricing in at least five benchmark interest rate hikes this year.

The monetary tightening actions are not only focused on the United States. Last week the European Central Bank reacted to the strong rises in inflation in the region (5.1% annually in January) and in her press conference, President Lagarde made it clear that there are interest rate hikes in the near future. In the Bank of England it was decided to apply a second increase of 25 basis points; and further increases are anticipated going forward.

The expectation of a more aggressive authority has been clearly reflected in the money market. The two-year Treasury bond rate has completed an increase of practically one percentage point since December and stands at 1.33%; For its part, the 10-year bond rate has already risen to a level of 1.94% in the same period (+54 basis points).

An aggressive monetary policy represents a very adverse factor for the stock markets, and eventually for the economy. The recent volatility is nothing more than evidence that there is a headwind in equity markets.

The environment seems to have changed in relation to the last 12 years where there was a clear stimulus policy. Such a change is not free, we see it in the negative returns of the Stock Market and in the losses in the bond positions. We have already warned before, the year looks to generate little profit on investments.

Under this complicated context, the Bank of Mexico will announce its monetary policy decision today. We probably couldn’t describe a more difficult setting for the debut of the new Governor.

The pressure of inflation at the local level, which yesterday showed an increase in the underlying part (which excludes energy and food prices); and now the expectation of a more aggressive Fed, as well as of the actions of central banks of comparable countries (last week the Central Bank of Brazil increased interest rates by 150 basis points, which are already at a level of 10.75 %), seem to have cornered the Governing Board.

Banxico must be aggressive. The money market already discounts half a point and there are voices that even ask for three quarters of a point. The movement may be within what the market expects; what yes, is that we expect a speech that will continue to be emphatic in the priority to control inflation and align with international financial circumstances.

Regarding the outlook in the more distant future, we are surprised by the equation of complacency with inflation expectations: forceful actions are expected and by 2023 inflation will have dropped to at least a level that would lose relevance.

It seems to me that in the markets the struggle to reverse inflationary pressure could end up dragging on and this could give rise to even more adverse surprises in the interest rate environment.

The risk load is great, we have been observing it since the beginning of the year and it will surely be present for the next three weeks before the Fed makes a pronouncement.

*Rodolfo Campuzano Meza is CEO of Invex Operadora de Sociedades de Inversión.

Twitter: @invexbanco

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