Do Central Bankers Need Their Eyes Checked?

TL;DR

Despite the recent actions of the central banks, Warren Pies, co-founder of 314 research, believes that a disinflationary scenario is looming, forcing central bankers to be behind the curve in their policies.

Transcript

foreign happy Friday everyone this is Andrea Steno from real Vision speaking we are live with the concluding real Vision Daily Briefing of a big macro week we've had 50 basis points from the film Reserve we've had 50 basis points from the European Central Bank and we've had 50 basis points from Bank of England but my guest today is very certain tha... Read More

Key Insights

• 😀 Central banks are trying to maintain tough policies to prevent loosening of financial conditions, even in the face of disinflationary data.
• 🏦 The Federal Reserve and other central banks are potentially behind the curve and may be forced into a policy mistake.
• ⏯️ Weakness in the stock market is expected in the second half of 2023, with potential for a relief rally during the Federal Reserve's pause.
• 😨 Inflation is expected to come down rapidly, driven by factors such as declining car prices, energy becoming deflationary, and delayed CPI shelter inflation.
• 🧑‍🏭 The current sell-off in oil prices, driven by positioning and negative seasonal factors, may present a buying opportunity for a potential relief rally in Q1.
• 🫢 European households are experiencing higher costs for electricity and heating due to supply-driven factors such as decreased gas flows from Russia.

Questions & Answers

Q: Why do central banks, such as the Federal Reserve, continue to maintain tough policies despite disinflationary data?

According to Pies, central banks are trapped in a difficult situation and need to maintain tough policies to prevent loosening of financial conditions. They are trying to convince the market that they will be tough, even in the face of disinflationary data.

Q: What is the potential impact of the recent market price action on equities?

Pies believes there will be more downside upcoming in equities. While there may be short-term relief rallies during pauses, he expects weakness in the stock market due to concerns about the macro environment for earnings. Ultimately, he predicts weakness in the second half of 2023.

Q: How do past inflation pauses by the Federal Reserve impact equities?

Typically, equities rally during a pause period. However, preceding the pause, there is usually a decline of around 5-10%. This weakness is necessary to nudge the markets and get the Federal Reserve to stop hiking rates. Therefore, a relief rally can be expected during a pause period, but caution should be exercised as weakness may come later.

Q: Is the potential recession priced into equities and bonds?

Pies suggests that the current pricing in equities and bonds reflects an expectation of a soft landing. However, he believes that a soft landing is unlikely and sees risks for a recession to materialize in the second half of 2023. Thus, the potential recession may not be fully priced in.

Summary & Key Takeaways

• Central banks, including the Federal Reserve, European Central Bank, and Bank of England, are not convinced that inflation is imminent, unlike Warren Pies who argues for a disinflationary scenario.

• Pies suggests that central banks are in a difficult position, trying to maintain tough policies despite clear disinflationary data.

• The Federal Reserve is expected to pause in Q1, but according to Pies, they should have already paused given the current data, leading to a potential policy mistake.