Deutsche Bank, the first major bank to predict a US recession in the current era of inflation, now sees a chance that gains will come nowhere near as forecast or Federal Reserve policymakers expect.
Deutsche Bank DB -2.61% macro strategist Tim Wessel said in a phone interview on Wednesday that “there is a real chance the market is underestimating the likelihood that inflation is accelerating or not slowing down fast enough.”
His comments come as several market participants — including Rob Daly of Glenmede Investment Management in Philadelphia — also warned that inflation could prove resilient to Fed rate hikes in the second half of the year. Financial markets may be in a bad position, and if that scenario materializes, investors and traders could face further turmoil similar to that seen in the first half – with some seeing a growing risk that the Federal Reserve could be noticed. as if he had lost control of inflation.
Read: What is at stake for financial markets if investors are again confused with inflation in the second half of the year?
“If you look at expectations over the last 18 months, they’ve all gone in one direction – down – whether it’s professional forecasters, markets or the Fed. I see no reason why we shouldn’t think everyone is underestimating the chances of higher inflation,” Wessel said.
“We now assume that we have overlooked some fundamental changes in inflation that we have not taken into account, and now see a real possibility that the market is underestimating the chances of inflation accelerating or decelerating fast enough,” he said York strategist.
This idea is supported by inflation derivative traders who have had accurate inflation forecasts for much of the past year and have the most money to do it correctly: you are now seeing about another four months of annual CPI. Values just under 9%, up from a near 41-year high of 8.6% in May.
Thursday’s data on the PCE, or personal consumption index, is expected to show a 0.4% monthly gain in May in the base reading that subtracts food and energy, based on the median forecast of economists contacted by the Wall Street Journal. That’s in line with Deutsche Bank’s expected monthly gain of 0.38%.
However, the problem isn’t the profit per se, but rather the probability of 0.3% of core PCE following three months in a row from February to April, as well as the monthly deduction of 0.4% in January and 0.5% of the monthly profit in December.
In their latest forecasts, published on June 15, policymakers have captured a decline in PCE inflation from 2022 to 2024. And professional forecasters also expect moderate inflation.
“Inflation is certainly not going to slow down as quickly as markets and the Fed had hoped,” said John Silvia, founder and CEO of Dynamic Economic Strategy in Captiva, Fla. The signals are that input prices continue to rise faster than people have priced in. “
“Either the markets and the Fed accept higher inflation, or policymakers actually pursue higher interest rates to fight inflation: either way, it’s bad news for the economy,” said Silvia, former chief economist at Wells Fargo Securities, am Wednesday. “If the question is whether there’s a hard landing in the cake – which means two or three quarters of negative real economic growth and higher inflation and unemployment – then to me the answer is yes.”
As part of the increasingly hot inflation data, the Fed will “continue to brake,” Wessel said. This will lead to higher initial interest rates, flatter government bond yield curves, increased volatility, insufficient risky assets and widening credit spreads, he said.
Such moves “can occur any day and even immediately after the next inflation press, with rates facing a big whiplash and any inflation press able to move the needle,” Deutsche Bank’s strategist said.
For now, the Fed will likely “do its utmost to keep inflation expectations completely unclear and eventually win the battle.” It’s just a matter of how big the pain is,” Wessel said. He said it was also fair to say there was a possibility that policymakers would lose control of inflation and “I wouldn’t want to rule out that possibility”.
Earlier this year, Deutsche Bank became the first Wall Street bank to predict a recession — a thesis that has only gained credibility since. Revised data released on Wednesday showed the economy contracted at a faster-than-expected 1.6% a year in the first quarter. In addition, Fed Chair Jerome Powell said there was no guarantee policymakers would be able to give the US economy a soft landing.