Strategy Note /

Watch What CB's Do, Not What They Say

  • Fed & ECB downshift hikes, step up rhetoric - pay attention to what CB's do - not what they say.

  • 2H 2022 US inflation running at 2.4% annualized while Atlanta Fed Q4 GDP nowcast at 3%, seems like fabled soft landing.

  • Dot plots are dangerous - disregard - focus on 22 headwinds shifting to tailwinds. Non US equity OP the new game in town

Jay Pelosky
Jay Pelosky

TPW Founder & Global Strategist

TPW Advisory
16 December 2022
Published byTPW Advisory

From one side of the Atlantic to the other the actions and messages were similar, a step down from 75 bp hikes by the Fed & ECB to 50 bps and a step up in hawkish language from Chairs Powell & Lagarde. It makes sense in a way – Central Banks (CB) want to keep animal spirits muted while they stepdown their hikes & allow the lagged effects of their previous rate cuts to cool economies and hence inflation. They say don’t fight the Fed – we take that to mean don’t fight the Fed’s actions.


The good news? That’s exactly what is happening with US CPI over the past five months running at roughly 2.4% annualized according to Bloomberg; one can imagine December’s price data being similar to prior months suggesting that inflation over the 2H of the year has been in fact in line with the Fed’s target.


This is true even as the Atlanta Fed’s Q4 GDP Nowcast is calling for roughly 3% growth – the juxtaposition of these two data points would seemingly imply the potential for the fabled soft landing (our Middle Way) derided by so many to actually manifest… inflation around target while growth holds up well above recessionary levels.


While the European story is not quite as clean given the energy price effect still working its way through Europe it seems clear that inflation has peaked there as well while the economy remains in a low growth mode with data (PMIs picking up M/M) suggesting the trough might have already been reached. Its important to note that Europe has been through its first cold snap of the winter and yet Dutch (BM) Nat gas prices remain stable and well below peak levels.


As such all three of the 2H keys we outlined back in June: pace of US inflation’s decline, the path of Europe’s energy prices and China’s ability to move off Zero Covid, are moving in the right direction. China’s move off Zero Covid has been the biggest surprise of the past month and it is a positive surprise for global growth & risk assets. BTW, Thursday’s announcement by the US Public Company Accounting Oversight Board (PCAOB) that it had free access to review China based auditor accounting of the 200 odd Chinese firms listed on US exchanges is further good news for China equity.