Investment Institute
Viewpoint Chief Economist

Jobs Hit Bulls

  • 06 February 2023 (5 min read)

  • The “dovish nuggets” in the Fed and the ECB’s communication last week were sparser than what the market reaction would suggest. The US payroll – rightly - put a dampener on the market enthusiasm.
  • We are concerned by the steep decline of the “credit impulse” in the Euro area – but the ECB may believe wage bargaining will be slow to react to a deterioration in economic conditions.

For the “dovish pivot” to be imminent, two conditions need to be fulfilled. First, communication from the central banks need to change. Second, the dataflow needs to be consistent with inflation landing within an acceptable timeframe. There were some tentative alterations to the Fed and the ECB’s messages last week, even if we think they should not be overstated. In the Q&A, Jay Powell may have been too vague in the rebuttal of the market still pricing cuts. The ECB has acknowledged that the balance of risks around their inflation baseline scenario is now “more balanced”. But the market’s enthusiasm in seizing on these dovish nuggets crashed against the strong US labour market data coming out on Friday.

Christine Lagarde’s slight communication downshift was in our view heralding more a mere slowdown in the pace of hikes to 25 basis points after March than a pause, and we continue to think the risk to our unchanged central scenario – that the ECB stops after hiking to 3.25% in May – is subject to an upside, rather than a downside risk. While we think the market is too confident now on growth prospects in the Euro area – we are concerned by the steep decline of the “credit impulse” in deeply negative territory – we also believe the ECB is worried about the impact of some of the institutional characteristics of the European labour market in 2023: centralized wage bargaining systems can result in a delayed response of wage dynamics to a deterioration in economic activity, as past inflation plays a bigger role than in decentralized system, such as the one which prevails in the US.

In a nutshell, while in the US the issue is that the monetary tightening has not bitten enough yet to tame the labour market, in Europe it may be that the monetary is starting to work its way through the economy, but with only slow impact on underlying inflationary pressure. We would not bet on the patience of policymakers, however “less hawkish” they have sounded recently.

Related Articles

Viewpoint Chief Economist

Draghi Captures the Zeitgeist

Viewpoint Chief Economist

Zoom on the Boom

Viewpoint Chief Economist

Postcard from Davos


    This website is published by AXA Investment Managers Asia (Singapore) Ltd. (Registration No. 199001714W) for general circulation and informational purposes only. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities. It has been prepared without taking into account the specific personal circumstances, investment objectives, financial situation or particular needs of any particular person and may be subject to change without notice. Please consult your financial or other professional advisers before making any investment decision.

    Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

    All investment involves risk, including the loss of capital. The value of investments and the income from them can fluctuate and investors may not get back the amount originally invested. Past performance is not necessarily indicative of future performance.

    Some of the Services and/or products may not be available for offer to retail investors.

    This publication has not been reviewed by the Monetary Authority of Singapore.