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Cyclical nature

Next Wednesday the Fed will conclude the last FOMC of the year. The scorecard for the year is good: No recession, full employment, equity markets close to peaks, and above all, inflation under control, hopefully on its way to the 2% goal. But the cyclical nature of all these indicators tell us that at some point they will turn. In the chart below, we can see inflation during economic expansions, from recession troughs to peaks since 1870. You can see that the current cycle has been relatively short, at least so far, and that if we continue with an economic expansion, and dodge the (recession) bullet, prices can continue to rise as they have done in past cycles. And if inflation falls, it’s highly likely it will be due to an economic recession. But that’s not what the market is discounting: what’s priced in is 4-6 rate cuts, and just a slowdown, not a recession, which is somehow contradictory. There needs to be an adjustment period.

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Source: Jurrien Timmer

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