A just-published report updated our view on global financial markets and the evolving expectations for monetary policy in the major developed economies. The widely anticipated interest rate easing cycle that was supposed to start this autumn, driven by weakening growth and much lower inflation, is on ever-shaky ground.
The Fed et al have consistently underestimated the resilience of global growth and the stickiness of underlying inflation. To this end, despite pausing its rate hikes earlier this month, the Fed still lifted its terminal rate for the fourth time this cycle and has again further delayed a return to a 2% inflation environment.
What have central banks “missed” in terms of formulating their projections? They have consistently underestimated corporate profitability and the business sectors’ ability to pass on higher input costs to end-users. Solid profitability, in turn, has driven strong labor demand. The global Manpower Employment survey for Q3 provided a shocker to economic bears: hiring intentions actually strengthened meaningfully, rather than moved lower as seemed likely. All the major countries’ employment indexes are at historically elevated levels (and this strength incorporates the contraction in global manufacturing activity and the layoffs occurring in select tech companies and pandemic-beneficiaries). Business executives may have had reasons to turn cautious, but they didn’t.
Net: the Manpower survey decisively dashed hopes for those betting on a recession in 2023 and lower policy rates ahead, and was bond-bearish.