According to central bankers and politicians, developed market economies and consumers are healthy and corporate balance sheets are strong, and can thus deal with tightening financial conditions.

It is a mantra that has come up often in the past few months and might soon be remembered the same way as “transitory inflation”. Purchasing Managers’ Indices (PMI) have just dropped below 50, indicating contraction of the manufacturing sector, and consumer sentiment has been abysmal for some time amid soaring inflation and negative real wage growth. Company earnings for the second quarter are so far down 6% and 41% in the US and Europe, respectively, while US GDP contracted in the first half of 2022. Yet inflation has not even started to roll over and markets still expect the Fed and ECB to deliver another 90 bps and 100 bps of policy rate hikes, respectively, until year end while simultaneously reducing their balance sheets. 

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