Sticky Inflation And Strong Labor Demand Versus Banking Worries – March 27, 2023

A just-published report examined the ongoing panic in the major banking systems, and concluded that regulators will ultimately do whatever it takes to restore confidence in their banking systems. Moreover, the Fed and some other central banks have already tempered their hawkish rhetoric, which should help to calm nerves. Nevertheless, sentiment relating to banks is fragile and fears could linger for a while longer.

Although panic-stricken investors have rushed into government bond markets, the macro backdrop is still evolving in a bond-bearish fashion.

  • Disinflation in the DM world is progressing, but at a slower pace than most had anticipated. Worse, core inflation is proving to be sticky, as are wage demands. Ominously, the U.K. core inflation rate edged higher last week, pressuring the dovish BoE into another rate hike. Bond bulls have bet that a return to 2% inflation is in the cards, we disagree.
  • Meanwhile, the quarterly employment survey for the major developed economies actually ticked up from already historically elevated levels (with the notable exception of one of the weak link economies, Canada). It is impressive that hiring plans held up in the face of central banks becoming hawkish and borrowing rates surging in the past six months.

Net: if confidence in DM banking systems holds up, as we expect, then corporations are likely to stick to their upbeat Q2 hiring plans and a recession will (once again!) be avoided. Forward markets are discounting sizable policy rate cuts beyond the near run, which MRB does not expect to occur.


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