I am always amazed at how short-sighted the financial media is: all screaming about the latest interest rate hike spreading panic about the state of the economy and financial markets. There is nothing to shout about: i financial marketsi move by trends and the rising trend in rates will continue until mid-2023. Why am I writing this? Because the market consensus is that and to change the consensus it takes time, so even if the consensus were wrong in any case it takes months to straighten it out. So the consensus is always right, barring exceptional events. Here are some graphs that show how the consensus in the US is now for a continuous rise in rates until the end of December 2022 (note the red arrows):
The evidence that rates (and the economy, and financial markets) are moving in a proven trend comes from the past (and if not where else the aspirin we take when we have a headache has been tested in the past on a sample of patients and it was found that it did more good than harm). In the graph that follows in red the trend of rates for 3 months from today, 6 months from today, 9 months from today (always rising) then horizontally upwards up to 18 months and then downwards. In the other black, blue and blue and gray curves, the trend of the past economic cycles. So we no longer have to put our hands in our hair when the central banks rates will rise again because as the Americans say “it’s written on the wall” and if you don’t read it you are completely off track.
Obviously all this impacts on GDP and its growth but the fact that central banks are “serious” and determined on inflation is a plus for the financial markets and that is why prices do not collapse. There growth in Europe it is seen in decline by the market consensus and by the ECB but this is now perceived as a negative aspect because the bottlenecks of “disruptions” in supply are widened by a demand that begins to recede (credit card expenses in the US they are always above the pre-covid level).
Morgan Staley in the chart below shows how earnings per share are seen to fall according to his Leading Earnings Indicator but this is normal because if the GDP company profits drop. Until when and how long but I point out at the top left of this chart an R square at 0.8 which is huge or this leading indicator accurately predict the future (where by accurately means not always but a lot).
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In reality, the financial markets had already foreseen everything and if we look at our Ftse All Share index we notice how now (also taking into account today’s rise that does not appear on the following chart) prices have bounced 3 times on the same support that seems support the market.
Whether it is the fact that the stock market precedes the economy or that it is the economy that is conditioned by the Bag (this is something that I have never understood and will never understand or at least if I can then I will tell you) it is not certain but the fact is that it seems that everything that happens now has already been discounted by the prices: and seen so it is easier for it to go up or horizontally than to collapse.
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