No recession going into 2023. Australia's bell weather economy is stuck in persistent inflation, returning in the last quarter of 2022. Now at 7.30% from 6.1%. All eyes on China's 'covid' supply chain shock and the U.S. inflation reprieve of lower fuel costs spluttering out
The markets, once again, are mispricing stagflation but rather pricing in a recession; which is no where to be seen, except for programmers of so called algorithmic systems (AI?) that scour news and markets feeds for market trends, that have allowed the automation of the market to focus on a "recession". Yet, this would be as much as a human trader would do working in an investment bank. Why? Because a recession means the Federal Reserve and other Central Banks will pause rates hikes or even cut them. Which is good for speculation.
However, stagflation which was building from 2022 all the while trillions that were pumped into the global economy in 2020 via governments and central banks have been slowly draining out via rate hikes. Note the risk barometer that is the Australian Dollar (AUD), which has been stuck under 0.70 since July 2022 (Chart 1), regardless of the Reserve Bank of Australia's tandem rate hikes through out 2022 at 3.10%. Chart 2 sums this up perfectly issue that Australia and other developed countries have, is their slow pace in interest rates (white line Aust rate at 3.10%) in compared to the U.S. rate (blue line). As one can see, the current Fed rate is 4.50% which is causing a demand for U.S. Dollars, hence why the AUD has stayed crimped under 0.70, which in turn leads to further inflation issues within Australia. Australia's inflation rate jumped from 6.1% Q2 2002 and overall is close to a 40 year high at 7.30% (yellow line).
The two horizontal pink lines are the RBA's possible terminal points at 4.00% and 4.25% which may need to be adjusted higher.
This is not the sole reason for market mispricing pf stagflation and recession and I don't think Central Banks are running a crony game (within consideration) with Wall Street at all. It is the uncertainly of inflation and stagnated economies that are picking up steam with masses of job losses already beginning to occur in 2023 at this point in time from the tech sector, this could mark an extremely stagnated economy looming in 2023 with inflation still too high.
It would lethal for global economies to await inflation to peak out in the U.S (not with the oil price over $75). and the sleepy (had just awoken) 'infected' Chinese Covid dragon to save the day as way of gauging a so called 'soft landing'.
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