Risky assets rallied strongly over the past few weeks on the back of extremely bearish positioning, improving economic data and investors’ expectations of a Fed pivot in early 2023.
While the July inflation data was slightly lower than expected, a 8.5% inflation rate and a 3.5% unemployment rate are hardly preconditions for a dovish pivot by the Fed. Yet, investors seemed to ignore all warnings until Chair Powell delivered another hawkish speech at the Jackson Hole conference, reiterating the commitment to bring down inflation to 2%. Similar comments were also made by central bank speakers of the ECB and the BoE who face a more difficult situation. Spiralling energy prices continue to fuel inflationary pressures while the growth momentum deteriorates. Having to fight inflation while risking a steep recession or worse – a fragmentation of the Eurozone – makes the ECB’s policy less predictable.
