(CercleFinance.com) – Since the summer of 2021, all players in the financial world have had their eyes fixed on a key indicator: inflation. Between the pandemic and massive stimulus plans, between the war in Ukraine and its consequences on the commodity and energy markets, prices are moving in one direction: upwards.
Result? Inflation which is taking hold on both sides of the Atlantic from the summer of 2021. In the early stages, the central banks – Fed and ECB in the lead – try to reassure, insisting on the ‘transitional’ nature of the ‘inflation.
But the figures are stubborn and the institutions must resolve to activate the rate lever in order to curb the rise in prices – even if it means causing a recession. Everyone then had in mind the success of this strategy put in place by Paul Volcker, chairman of the Fed from 1979 to 1987, who had managed to stem the inflation that was hitting the United States at the time.
Except that the months go by, that the rate increases follow one another (we are now talking about a central rate of 5.5% in the USA and 4% in Europe), that the Fed multiplies the aggressive declarations and… that the decline in inflation remains very subdued. In Europe, it is even estimated that its peak has not yet been reached. At Richelieu, we are simply beginning to wonder if central banks still really have control over inflation…
‘We have seen that they could fight against crises by injecting cash, their role is more debatable in the fight against inflation’, explains in substance Alexandre Hezez, Strategist of the Richelieu Group.
According to him, central banks are facing a complex situation, in addition to their inefficiency so far in controlling inflation, they are also facing an unprecedented crisis in the bond market. Another difficulty and not the least: ‘the markets are so anticipating the future drop in rates that the central banks will have to continue to scare the market to avoid any attempt to improve credit conditions which would be inflationary’.
In Europe, the ECB, until now less vehement than its American counterpart, should in turn show more aggressiveness by activating the rate lever. Christine Lagarde has also announced it: no rate cuts before inflation has fallen back below 2%. The markets are warned.
At Richelieu, these new conditions mean that we no longer hesitate to speak of a ‘change of era’, with a market that would return to the situation of the years 1990-2000 with higher, more realistic rates as well. ‘We are coming out of a period where rates were extremely low, companies that should have sunk were kept afloat, there was a misallocation of capital with crazy projects… all because the money was free ‘, essentially explains the analyst.
In this context, Richelieu does not anticipate a cut in Fed and ECB rates before mid-2024.
The group announces that it has identified certain ‘interesting’ themes: dividend growth, relocation and digitalisation. In addition, ‘the context of higher rates encourages us to maintain our exposure to the debt of well-rated companies’, concludes Richelieu.
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