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From “geopolitical shocks” to tensions in the global banking system: Goldman Sachs analysts fear a setback in the economy in the face of recent events.
Against this backdrop, they have downgraded GDP forecasts for the eurozone to 0.7% for 2023 and for the US to 1.2% for the quarter. Judging by the US Dollar Index, close to the 103 level, investors also look at the future with apprehension.
Of course, there are also exceptions. After raising rates by another 50 basis points, the ECB raised its forecast for economic growth in the Eurozone in 2023 by half a point to 1%. The regulator also expects inflation to moderate to 5.3% this year as energy prices fall.
What could go wrong? In case the “full depreciation” of Credit Suisse’s Tier 1 bonds ends up generating a domino effect, the European regulator could be forced to intervene, easing access to credit and injecting tons of liquidity into the financial markets.
In the worst-case scenario, the ECB could reverse the course of monetary policy. The problem is that an increase in the money supply and a pause in rate hikes could fuel inflation or negatively affect the speed of the disinflation process.
The Fed, in this regard, is one step ahead. In order to avoid further contagion in the financial system, the regulator gave the green light to the launch of the BTFP (Bank Term Funding Program). As a result, the Fed’s balance sheet has increased by $298 billion to $8.7 trillion.
The question now is whether we will see a rate hike at Wednesday’s meeting. Bill Ackman, founder, and CEO of hedge fund Pershing Square Capital Management, believes it is time for a pause. The problem is that the dovish stance could have irreparable consequences.
As mentioned earlier, the disinflation trend could slow even if price increases do not resume. In the worst-case scenario, the United States could face stagflation. Let us hope that the new White House (Warren Buffett) does not allow a repeat of the “Reagan era”.
Finally, yet importantly, the worsening of the global geopolitical situation will not add to the optimism of the market. In this regard, the most important event on the economic calendar will be a three-day official visit to Russia by President Xi of China.
