Markets are in a wait-and-see mode. In fact, global stock indices have been moving sideways for about a year and the fluctuations are decreasing from cycle to cycle. So the supporting and dampening factors have balanced each other out so far.

From an economic point of view, the question remains whether either inflation or growth will be the first to make a significant and rapid downward move.

A rapid decline in inflation would allow for a soft landing of the economy, as central banks could cut key interest rates. However, a rapid decline in growth indicators accompanied by uncomfortably high inflation would make it more difficult to ease monetary policy, increasing recession risks.

Overall, the economic indicators cover both cases but no scenario can be ruled out with a high degree of probability.

In addition, growth indicators follow monetary policy with a time lag of around one year. The effects of growth indicators on inflation also exhibit a considerable time lag.

However, the actual time lags and the actual effects are very uncertain. This highlights why more and more central banks are signaling a pause in the rate hike cycle.

The aim, after all, is to avoid as far as possible unnecessary rate hikes that could trigger a recession. Premature easing, in turn, could have a negative impact on medium-term inflation dynamics (too high inflation).

More and more central banks are therefore also adopting a wait-and-see stance.

On the negative side, there is stress in the U.S. banking system, the imminent achievement of the sovereign debt ceiling in the U.S., the tightening of bank lending guidelines in the U.S., the euro zone and Canada, inflation that is too high, a restrictive monetary policy, a labor market that is too tight and some recession indicators.

The last category includes the Conference Board’s Leading Economic Index, which will be published this week for the month of April.

On the positive side, economic growth has so far proven remarkably resilient to the many negative factors. Moreover, there are signs that the labor market is easing from the right side.

The number of job openings has declined in the USA, while the unemployment rate has remained at a low level. Inflation rates are also falling, although the pace is too slow.

In addition, more and more central banks are signaling a pause in the rate hike cycle in order to better assess the impact of the previous rapid rate hikes.

Inflation rates are showing a downward trend, albeit at different speeds. Overall, the level of inflation is too high. In the U.S., consumer prices rose by 0.4% month-on-month and by 4.9% year-on-year in April (peak: 9% in June 2022).

On a positive note, inflation in the services sector (excluding housing) is on the decline. The central bank is closely monitoring this indicator.

On the negative side, however, inflation for price components with high persistence is still at 6.3% year-over-year (Atlanta Fed Sticky Core Prices).

In addition, consumers’ long-term inflation expectations unexpectedly rose in May. The College of Michigan survey shows an increase from 3.0% in April to 3.2% in May (preliminary estimate).

This is worrisome as it is the highest level in the current inflation cycle. A similar picture can be observed for the euro zone.

According to a report by the European Central Bank (Consumer Expectations Survey), consumers’ short- and medium-term inflation expectations have risen. The risk of losing the two percent inflation anchor remains high.

There are increasing signs of the impact of rapid increases in key interest rates. In both the eurozone (Bank Lending Survey) and the U.S. (Senior Loan Officer Opinion Survey), reports on lending show further tightening of guidelines and a further weakening of demand for credit.

Moreover, in the U.S., the trend of increasing initial claims for unemployment insurance has continued, and both consumer confidence (College of Michigan) and small and medium business confidence (NFIB) have declined.

On the goods front, poor Eurozone manufacturing data stood out last week. This week, industrial production in the eurozone is expected to contract significantly in March.

Finally, in China, both exports and imports contracted month-on-month. The V-shaped upturn in China is mainly taking place in the service sector.

Overall, the positive and negative factors have balanced each other out so far.

Market participants continue to wait for the decisive indication as to whether a soft landing (including a slight contraction in GDP) or a hard landing (recession) is more likely.

Article based on a story from Erste Asset Management as copyright owner