Investment Institute
Viewpoint Chief Economist

Roaring Fifty

  • 12 December 2022 (5 min read)

  • We expect a “twin gear-change” in the pace of tightening from the Fed and the ECB, both opting for 50bps, but also quite a lot of hawkish rhetoric.
  • The EU has few politically, financially, or institutionally appealing solutions to deal with the US IRA challenge.

It’s a big week for central banks. Market pricing and analysts’ expectations have converged around a “gear-change” in the speed of tightening, with the Fed and the ECB both opting for “50 bps only” hikes. We concur, even if the risk of another jumbo hike seems to us a bit higher in the Euro area than in the US. Yet we also expect this slowdown in the tightening pace to come with a big dollop of hawkish rhetoric to make it clear that the central banks are “not done yet”. This is especially a challenge for the Fed, given how markets have been quite stubborn in pricing in rate cuts quite quickly. However, the Fed can use quite effectively its “dot plot” to send clear messages. When it comes to the ECB, it’s less the trajectory for policy rates which is likely to be the “piece de resistance” but the first indications on Quantitative Tightening. We don’t expect much granularity this week on this, but we believe the ECB won’t want to “rock the boat” and will proceed carefully. Even a very gradual reduction in reinvestment can have a visible market impact though. We expect the supply of government bonds net of ECB operations to double next year relative to 2022.

Still, beyond these crucial monetary policy decisions, we also wanted to take a bit of perspective and explore further a theme which we find is going to rank more and more prominently in the macroeconomic debate: the rebound in US competitiveness, especially when compared with Europe. The Inflation Reduction Act is crystallising European fears of losing out to the US in the potential next industrial revolution: the green transition. We explore the options for an EU reaction, but none of them looks ideal from a political, institutional, or practical standpoint. Rather than focusing on a form of “retaliation”, the most productive approach would consist in delivering a boost to green transition investment by launching a “Next Generation EU” 2.0 programme, but we fail to perceive much enthusiasm across member states for such an additional effort.

Related Articles

Viewpoint Chief Economist

Jobs Hit Bulls

  • by Gilles Moëc
  • 06 February 2023 (5 min read)
Viewpoint Chief Economist

Revisiting the 1994 miracle

  • by Gilles Moëc
  • 30 January 2023 (5 min read)
Viewpoint Chief Economist

Postcard from Davos

  • by Gilles Moëc
  • 23 January 2023 (5 min read)

    Disclaimer

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.

    All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document.

    Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.

    Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ

    In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.