Markets More Sensitive to Growth Than Inflation, Says IBI Economist
Markets are increasingly sensitive to growth forecasts over inflation, notes IBI chief economist Rafi Gozalan, projecting 1-2 gradual Federal Reserve rate hikes ahead amid tech investments and sticky price trends.
Markets show higher sensitivity to growth forecasts than to inflation, according to Rafi Gozalan, chief economist at IBI Investment House, in his weekly macro review.
Inflation and Federal Reserve Policy
According to Gozalan, the current inflation environment, alongside the moderating effects of eroding disposable income and rising interest rate environments, does not push the US Federal Reserve to accelerate the pace of interest rate hikes, but rather to perform a gradual adjustment only. "We expect about 1-2 additional hikes compared to close to 3 hikes currently priced in the markets," he notes.
Gozalan points out that energy prices consolidating at a high level of around $95 over the past 3-6 months will continue to pose a risk, and as long as there is no improvement in the inflation trend or deterioration in financial conditions, the likelihood of further rate hikes will remain relatively high.
Real Interest Rates and Market Reactions
The support for a rate hike comes from an increase in inflation momentum in recent months, reflecting a combination of sticky services inflation and rising goods inflation. Regarding the real interest rate relative to the general index, the current Fed rate is close to zero, but relative to core inflation, it is higher than 1%, while relative to expected rate paths reflected in two-year bond yields, the real interest rate is over 2%.
"It is reasonable to assume that if the Fed truly weighs market signals, it notices that most leading stock market sectors have been characterized by a negative trend in recent months against the backdrop of rising yields," said Rafi Gozalan.
Growth Risks and Technology Investments
Gozalan adds that as long as there is no acceleration in wages, inflation risks remain milder. Countervailing forces are currently acting on the economy, such as investments in technology and fiscal policy, versus wage erosion and the moderating effect of rising interest rates.
