Bloomberg News reports that it is being observed that the world economy has started the New Year on an optimistic note. However, that does not guarantee that the end of the year 2023 will see the same optimism.
What Factors Fuel Optimism in Financial Markets?
A few factors have fanned the optimism in the financial markets right at the beginning of 2023. These factors include a warmer-than-normal winter usually experienced by Europeans, a faster reopening of the markets in China, and a consistent drop in inflation in the United States. All these factors combined have given hope to the common man worldwide. It is also anticipated that these factors might be able to negotiate critical bends in combating inflation.
What is the Flip Side?
On the other hand, the continuous increase in the interest rates by the European Central Bank and Federal Reserve gives rise to speculations that if inflation proves to be sticky, a slump in the latter half of the year cannot be ruled out.
Markets are Gradually Recovering
Aside from the above factors that fuel optimism, a few other aspects must be considered to prove the same. These aspects are reasons enough for guarded optimism. The supply chain logistics, the industry which found all tangled up due to the pandemic and ongoing war between Ukraine and Russia, has eased out considerably, and the price pressures have become lenient and eased. The US consumer prices have surged by 6.5% in December compared to a year earlier, down from a high of 9.1% recorded in June.
If inflation ebbs, it will help in consumers’ purchasing power. The same consumers spent last year facing a financial crunch due to swelling costs. This was true for sectors like rents, food, and energy. This will help the central banks in scaling back their rate increases. This would also halt the speculations that the policymakers might go beyond to break something in the financial markets.
Bloomberg News also reports that Fed Chair Jerome Powell, along with his team, is planning to downshift to a quarter-percentage-point hike in the rate at the January 31st- February 1st policy meeting as per trade in the federal funds futures market. The same would follow an increase by about four points in December and four 75 basis point move before that.
While the dollar was on an astronomical rise, this step back has applied brakes on the same. This has eased considerable pressure on the central banks to match the Fed with rates.
Says chief global economist Megan Greene associated with the Kroll Institute, everyone has witnessed the dollar reaching its peak strength. Aside from these factors, the other positive points include continuous resilience in the labor market while businesses and households enjoy good health.
