Rising ‘Misery Indexes’ Challenge Central Banks to Blink: Mike Dolan

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LONDON — It’s Friday the 13th and more than $10 trillion has been slashed from the value of global stock markets this year, as “scores of misery” that mix inflation and unemployment rates soar. Is it already time for central banks to blink?

Markets began to panic over likely multiple central bank interest rate hikes to contain inflation from 40-year highs. Investors are desperate for any sign of this tightening calculus moving from price pressures to demand-sapping cost-of-living cuts and recession risks.

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Conditioned for years to wait for looser monetary policy to mitigate economic or political shocks, savers and speculators have had to adjust this year to the idea that high inflation in itself is perhaps the biggest shock. and that there is no “policy put in place” instantly.

Far from rushing to the aid of anxious stock and bond markets, central banks seem determined to continue their tightening. As Societe Generale points out, long-term bond yields and indices of tightening financial conditions are rising in tandem – which is unusual, after at least two decades in which yields have plunged in response to financial slumps.

But there is always a political tipping point if a looming recession itself negates inflation expectations.

Easing pressure on the cost of living is clearly the political priority. But energy and food prices pushed up by supply constraints may not respond to higher rates, while higher borrowing costs make credit more expensive for poorer households. poor and zap the often over-inflated assets of the rich.

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The two biggest political shocks of the year – Russia’s invasion of Ukraine and China’s zero-Covid lockdowns – exaggerate both inflationary and recessionary forces. But the speed at which the impact of demand dominates thinking is what markets must now watch.

The Washington-based Institute for International Finance on Thursday lowered its forecast for global growth to show “de facto stagnation” in the global economy this year, with China contracting this quarter.


Last week, the Bank of England looked like the first of the previously hawkish G7 central banks to balk at the near impossible task ahead. Showing both 10% inflation and a shrinking economy by the end of the year, he pushed interest rates up again, but revealed internal divisions over the need for more.

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Suggesting that the BoE’s hesitation is more than justified, Thursday’s data showed the UK economy had already contracted unexpectedly in March – even before energy price caps were lifted and taxes are not increased.

With money markets still expecting UK policy rates to more than double by over 2% next year, 2-year gilt yields are falling again, falling more than half -percentage point since the BoE meeting at 1.2%. The pound has plunged more than 3% over the same period and is now down almost 10% this year against the dollar.

Britain may have some particular domestic issues – including Brexit, a big energy price cap hike and a tax hike – but many may see it as a poster child for the act. balance of future policies.

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Even as European Central Bank officials openly talk about interest rate hikes, markets this week downgraded their expectations for tightening by the end of the year from 15 basis points to less than 80 basis points. German benchmark two-year yields plunged to zero from 35 basis points.

US Federal Reserve officials appeared to double down on their hawkish rhetoric of multiple 50 basis point rate hikes as April inflation of 8.3% again beat forecasts as labor markets remain tight.

Unlike Europe, yields on two-year U.S. Treasuries held above 2.5%, helping push an already high dollar to 20-year highs and further tightening conditions. world.

Still, the brewing storm has seen US money market estimates for the Fed’s peak rate next year fall back to 3% from 3.40% earlier this month.

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Are cracks appearing as ‘misery’ sets in?

So-called “Misery Indices” were devised in the late 1960s and are crude aggregators of inflation and unemployment rates designed to capture the extent of household stress. Some add official interest rates to illustrate the ebb and flow of credit costs.

Higher inflation is once again moving those seismographs out of public concern. Indices that capture interest rates will jump further in the coming months if central banks continue. And if inflation doesn’t come down before unemployment goes up, then the mix could get explosive.

From the G7, the UK already looks like the outlier with Britain’s ‘Misery Index’ already at its highest in over 20 years.

“The BoE is probably the first central bank to concede the battle against inflation in favor of rescuing the UK economy and consumer from the consequences of a deep recession,” Jefferies strategists told their clients.

“Nevertheless, the misery index will start to climb and that’s certainly not good for the pound or UK gilts.”

Related Chronicles: Pound’s plunge as BoE charts 10% inflation and recession ‘Mom and pop’ investors stayed dry in tech, crypto meltdown Fed keeps fingers crossed for recovery from 1994 as the hiking trail gets shorter

The author is Finance and Markets Editor at Reuters News. All opinions expressed here are his own.

(by Mike Dolan, Twitter: @reutersMikeD; editing by Kirsten Donovan)



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