Christine Lagarde

The Fed raises rates by half a percentage pointclosing 2023 with the first hit of the brakes on a maxi-squeeze that saw four consecutive increases by 75 basis points. A move that acknowledges the slowdown in inflation (7.1% in November) and the slowdown of the economy, but is not a prelude to a stop: the rate of increases “will remain appropriate”. The same scenario for the ECB, with the weak stock exchanges and the BTPs returning under tension: the differential has returned to exceeding 194 with the yield one step away from the threshold (4%) due to the EU’s findings on some aspects of the budget law, from the cash cap to the amnesty to the limits on electronic payments, some of which are an integral part of the Pnrr that the markets see as crucial for Italy.

And the appointment with the ECB which is preparing to announce the ‘roadmap’ on quantitative tightening (Qt), the process with which it will begin to unwind as early as 2023 of the 5,000 billion euros of bonds bought in the last eight years, weighs heavily. The investment house Pictet hypothesizes 300 billion less than in 2022, foreshadowing the exit of a significant buyer in a year in which Germany will make record emissions (539 billion is the estimate) and Italy also has considerable maturities. This is the path already taken by the Fed, which raised the rate on Fed Funds, as expected by operators, by 50 basis points, going from the 3.75%-4% ‘range’ to 4.25%-4.5% and announced that – perhaps with a winter break – it will raise rates again. The Fed intends to “maintain the tight monetary policy stance for some time,” Governor Jay Powell said, chilling the expectations of those expecting a cut in 2023. The disappointment weighed on Wall Street which veered lower with the Dow Jones losing over 300 points. The governors of the US central bank have indicated a rate on the Fed Funds of 5.25% in 2024, even beyond the expectations of economists, and Powell has announced that we cannot let our guard down on inflation, where upside risks remain.

In fact, expectations are for a soft landing of the US economy, with an estimated growth of 0.5% which rules out a hard recession. Thanks to the less dramatic than expected impact of the war in Ukraine and easing inflationary pressures both on commodities and in trade bottlenecks (such as lockdowns in China). A similar scenario awaits the ECB, whose governors are meeting in these hours, when the president Christine Lagarde will announce the decision. What was supposed to be a maxi-recession due to a European energy shock could actually end with a less dramatic economic slowdown. Of the two countries most exposed to Putin’s blackmail on gas, Italy and Germany, the former has shown signs of ‘resilience’ which have led the rating agency Fitch to revise to just -0.1% an estimate on GDP for 2023 which was previously was at -0.7%. The Ifo institute then reduced the disaster to -0.1% also for Germany, from -0.3%. Numbers that photograph a ‘mini-recession’ between winter and spring, just two quarters, and then a recovery. In theory it would be an ‘assist’ to the ‘hawks’ in the ECB Council who are pressing for a third consecutive tightening by 75 basis points. But inflation slowed to 10% in November after the record of 10.6% in October allows prudence: a hike identical to that of the Fed is likely, by half a point, which would bring the main rate to 2.50%.

After all, Frankfurt, by tightening the conditions of the Tltro maxi-loans, has already withdrawn almost 800 billion of liquidity and the hawks are offered the counterpart of the Qt. Someone, like the president of Confindustria Carlo Bonomi, is asking the ECB to stop: “There is a movement of thought that says: now a moment, let’s stop and think about the growth of the country”. In its equation, the ECB should also include EU industrial production, which fell more than expected (-2%) in October. But it seems unlikely that the economic difficulties, scaled down compared to what was feared a few months ago, will reward double-digit inflation which it is up to the central banks to curb.