The talk of a “central bank pivot”, i.e. a turnaround in central bank policies, is becoming louder again amid slowing economic growth and supposed stress in financial markets. While financial conditions have tightened and growth is arguably slowing, the situation is not dire, nor inflation low enough to call for an end of monetary policy tightening.
Inflation in the Eurozone is above 10% and increasing, with the average month-on-month inflation rate over the past three months pointing to 14% inflation on an annualised basis. While the US might have seen the peak in inflation, the more important core inflation measure, which excludes energy and food, is still trending upwards. In addition, we continue to see robust US labour market conditions. Looking at gauges of financial stress, we currently don’t see signs of severe stress either. Neither CCC credit spreads, implied equity volatility (VIX), treasury liquidity or overall financial conditions indices are showing extreme values (see chart). That said, we think that we are approaching an end in the hike cycle, but that should not be misunderstood as a pivot.