In recent days, the news comes from a slowdown in growth that is already underway and that could worsen in the future if financial conditions are less favorable.
The monetary policy statement issued by the United States Federal Reserve (Fed) on Wednesday was positive for the markets.
The reading of the words of the president of the central bank, Jerome Powell in his press conference seemed to be one of moderate aggressiveness and a still favorable outlook regarding growth.
The clarification of such a position injected calm and momentum into the stock markets. We continue to think that the idea of a soft landing is risky.
Judging by the reaction of the stock markets, with upward movements close to 3% in most of the indices in the United States, we should understand that the central bank’s pronouncement has been very optimistic.
However, everything seems to rest on Mr. Powell’s mention that no increases to the 75 base point reference rate are being considered in the next meetings; ergo, the Fed does not intend to be so aggressive for now.
Outside of that we did not see the desired assertion of a strong stance on the path of inflation. It is true that there was a return to the discourse of a high magnitude and of taking actions to establish more “neutral” monetary conditions in an expeditious manner, but there were no details regarding the causes of last year’s estimation error, nor was there a guide regarding to possible forward evolution.
The main question remains in the air: Will the Fed, with an aggressive policy, manage to reduce inflation without generating a sharp drop in growth?
President Powell mentioned that “it is possible” to implement a kind of soft landing because they still detect strengths in the economy; but the trend of several indicators and the presence of very direct risk factors do not justify the rebound in the markets.
The news in recent days comes from a slowdown in growth that is already underway and that may worsen going forward if financial conditions are less favorable.
US Gross Domestic Product for the first quarter, declines in business managers’ indicators in both manufacturing and service sectors, not only in the US but in other developed regions; the traffic jam generated by the confinement in China; the slowdown of the economies in Europe; all of these are factors that point to a very slow growth stage, (if not negative) that is already beginning to register.
From my point of view, the errors in the markets’ vision can come from an overconfidence that inflation will be reduced quickly; or from an overconfidence that growth will not be further affected.
In both cases the Fed makes a dim indication and continues to question its position. In the end, avoiding an additional shock to the markets seems to be relevant in their equation.
We are already on the adjustment path. It remains to be seen what its dimensions and consequences are. I don’t think the markets have started a significant winning streak since the positive reaction at yesterday’s close May 4th.
There is still a lot of work to be done for the Fed to regain credibility and for its guidance to be more decisive in investors’ expectations.
For now, keep expecting volatility, and plenty of speculation as growth and inflation data come in.
*Rodolfo Campuzano Meza is CEO of Invex Operadora de Sociedades de Inversión.
Twitter: @invexbanco