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Will the rally be revived?

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The latest ISM and PMI reports and the strength of the labour market have made it clear that the worrying predictions about the US economy are overblown.

In other words, the likelihood of a hard landing and recession seems to be ruled out.

However, this is not great news for markets, as it increases the risk that the Federal Reserve will not change its monetary policy for as long as expected.

That’s why the dollar appreciated 1.1% in the first week of the year, the S&P 500 and Nasdaq lost 1.5% and 3.2%, respectively, and the 10-year Treasury yield rose 4.7%.

However, whether the time has come for a turnaround in the markets or whether the bull market will soon return to the outlook will depend primarily on the data as it emerges.

In particular, if the CPI report shows further disinflation or the economy slows more quickly, investors could interpret this as a signal for central banks to adopt a more accommodative stance in their decisions.

On the positive side, this outlook is supported by lower oil prices, driven partly by a more stable geopolitical situation and the reduction in Saudi Arabia’s premium for its oil.

Does all this mean that we will finally avoid a recession?

Based on current data, it seems so. However, history suggests being cautious in the forecast. For example, in the early 1950s and 1970s, recessions occurred almost a year and a half after inflation had fallen.

This is due to the so-called lag: the adverse effects of interest rate hikes take time to manifest themselves in the economy. So, even if things seem to be going well now, this does not guarantee a bright future.

In the coming months, companies and households will continue suffering the consequences of high-interest rates. All of this could lead to significant problems.

 

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