Central Banks Face Growing Pressures: Markets Snapshot

Kevin Warsh argues that the Fed is likely behind the curve and will need to hike multiple times to regain control of inflation, which will keep US yields high. He contrasts this with Europe, where supply dynamics and weaker growth will also keep yields elevated, but for different reasons. He warns that failing to hike risks losing credibility in the Treasury market.

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Central Banks Face Growing Pressures: Markets Snapshot

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On the ECB side, I think it's a policy error. They hike this week, but there is risk they could be cutting towards Q4.

Asks if weakness in oil prices could set up yields to drop, noting this has been a major change for equities alongside oil.

Speaker1
Questions whether we can hope for a lower yield environment, noting that in the very short term at the front end of curves, falling oil prices might help.

Speaker2
Speaker3

The market may pare expectations for central banks, but our view is that this will NOT lead to a durable rally in fixed income. We expect high yields in Europe and the US.

In Europe, driven predominantly by supply dynamics. In the US, driven predominantly by Fed hikes.
The debate in Europe/UK is about inflation shock but weak economy and labor market, making second-order effects less likely. That is not the situation in the US.

Speaker2
Speaker2

On the ECB, I still think it's a policy error. They hike this week, but there is risk they could be cutting towards Q4. Household and aggregate demand in Europe is completely different from the US.

The new Banque de France governor will have a very strong message about growth. Pre-war growth was 1.3%, but the conflict has done substantial damage.
Speaker4

The ECB has to deliver high rates but cannot be too aggressive for the sake of reasonable growth.
Speaker6

My narrative for the Fed is either they are on hold or they hike multiple times. By the time they are forced to hike, they will acknowledge they are behind the curve and will have to go multiple steps.

It's a bit binary on the right path as well.
Speaker7

In the US, raising rates is something that will have to happen, even if it goes against the narrative of the presidency. The danger of not doing so is losing control of inflation and losing credibility as a sovereign power.

Institutional confidence, particularly in the Treasury market which is on the end of a very large budget deficit, is important.

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