No Room For Error!

As the dark clouds of the banking mess that rattled the markets swayed away, the markets focus shifted back to the macro data and the updates in energy markets this week. Most of the economic data shocked the street.

I have repeatedly reiterated that the monetary transmission acts with a 2-3 quarter lag, and the leading indicators were all flashing red. The red flags are now emerging in the lagging data of labor market as well.

We are gradually reaching a point where the data worsens, inflation moves down to 4% (due to base effects and growth plunge), and the bond markets forces Fed to cut rates.

One should not be surprised that the bond markets are now envisioning cuts of 75 bps before the end of 2023. Nonetheless, equity and credit markets remain complacent.

If the Fed indeed heeds what the market anticipates (cuts), we may be on a roller coaster ride for H2, where inflation likely resurges, and the pricing across asset classes becomes very volatile.

All in all, there is no room for er…