Central banks – quo vadis?

The recovery on the stock and bond markets since mid-June has come to an abrupt end for the time being. The prospect of an end to interest rate increases has unfortunately not been confirmed. This hope was buried at the latest with Fed Chairman Jerome Powell's speech at the central bankers' meeting in Jackson Hole last week on Friday. Stock markets closed sharply lower last week on Friday (S&P 500 - 3.37%) and this movement has continued this week (Nikkei -2.66%).

Falling commodity prices are passé for the time being. The hope that the highs in inflation rates are already behind us does not seem to be coming true. Coupled with this, the sharpness of central bank rhetoric is increasing. It has been announced that a restrictive monetary policy will be necessary for some time to dampen inflation fears, stabilise prices and, above all, put an end to inflation expectations and not inflame them even more. Whereby the sharpness of rhetoric has increased on both sides of the Atlantic.

In the U.S.A., key interest rates are expected to remain above 3% into 2027 and beyond. At least that is what can be observed on the derivatives markets. For the euro, too, more and more ECB members are arguing for a 75 basis point increase in the key interest rate at the meeting on 8 September. The time of a very hesitant monetary policy on the part of the ECB seems to be over and it seems to have come more and more to the conclusion that a significantly more restrictive monetary policy is also needed in Europe in order to put a stop to the spectre of inflation.

The focus of the central banks has thus returned to the fight against inflation - concerns about the development of the economy have receded into the background. But this is not the case on the stock markets, where concerns about the economy are once again in the foreground, coupled with possible fears of recession and, as a consequence, fears of falling corporate profits. The positive mood of the past weeks seems to have vanished for the time being and negative sentiment is currently dominating market participants.

Once again, the central banks are setting the tone on the capital markets and thus setting the framework conditions, with the prospect of further increases in key interest rates dampening hopes for rising stock markets and bond markets. Added to this is the prospect that key interest rates will be higher for a longer period, at least longer than many expected six months ago, and as we know: Expectations about the future determine what happens on the stock markets!