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The indicators are clearly opposite, the worst scenario is still present with the “ghost of inflation”

Scenario at America

According to the Financial Times, US financial markets are experiencing a new boom in 2023. Stocks, bonds, and even bitcoin all rallied in January. Emerging markets, gripped by the pandemic, also witnessed a large inflow of capital. The risk-on sentiment is based on expectations of a “soft landing” in the US: inflation falls rapidly and there is no recession.

However, investors were confused on February 3 when the US reported a high employment rate, which means that inflation could be higher than expected and the Reserve Federal will push interest rates higher for longer.

Until there is a clear direction of development for the US economy, the market will continue to fluctuate. Markets showed an early bounce on signs of easing price pressures in the US: inflation has eased from its highest level since summer and the Fed has slowed the pace of rate hikes.

Cloudy economic picture in the US: The indicators are clearly opposite, the worst scenario is still present with the specter of inflation - Photo 1.

The view of the Fed that monetary policy needs to be tightened before the rate of price increase is controlled does not deter investors. They predict rates will fall later this year – even after the Fed raised rates by 25 percentage points last week and warned of more hikes.

After jobs data showed the US added 517,000 jobs in January, much higher than expected, with unemployment at a 53-year low, markets moved closer to the limit. of the Fed and a sell-off occurred. As can be seen, the growth in the employment sector indicates that the labor market remains buoyant, and this will maintain price pressures.

At this point, markets are still predicting the future of the US economic outlook, with hard landings, soft landings and even “no landing” scenarios being put forward, having different impacts on the US economy. with investors and their positions.

Scenario “soft landing”

For some, the “soft landing” story still holds true. Steady job numbers coupled with a slowdown in annual earnings growth – hitting a 17-month low of 4.4% – suggest that the US can hit its disinflation goal without the inflation rate. unemployment rate increased significantly.

Others feel “insecure” that strong job growth and resilience in the service sector could lead to a “no landing” scenario in which the economy does not slow down and inflation continues. inflation and interest rates climbed to new highs.

Others are more wary of a “hard landing” scenario.

In fact, economic activity is weakening across the board: forward-looking indicators of the US manufacturing sector suggest the US may have fallen into recession, while the housing market and sales data Recent odd shows weakness.

If wage growth doesn’t slow down, the Fed may need to push up the cost of credit even further, which would leave the U.S. economy potentially in a faster recession. But at the same time, the weakness in the economy as a whole and the faster interplay of previous rate hikes could drag both growth and inflation down faster.

The economic picture is blurry in the US: The indicators are clearly opposite, the worst scenario is still present with the specter of inflation - Photo 2.

Financial markets are having a hard time valuing all of these risks. Contrasting views mean asset valuations will be particularly sensitive to new data and comments from Fed officials.

Meanwhile, the Fed needs to be consistent with its goal of reducing inflation to its intended target and make sure its message is clear enough. Whether the US economy undergoes a soft or hard landing scenario, there will be many ups and downs on the way there.

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