Mike Dolan

LONDON, (Reuters) – If an investor claims they know what will happen next in macro market markets, it is likely that they are lying.

It is impossible to forecast the future with confidence the policy and investment decisions made in the last 3-6 months, given the current confusion over inflation, output and jobs.

It is ironic that there seems to be less uncertainty in the long-term. Risk premia are traditionally much higher as more things could go wrong over extended time periods.

It may not be as difficult for forecasters, however, to view beyond extraordinary pandemic-related supply disruptions and labour market distortions rather than navigate a Northern Winter of still highly skewed economic statistics.

Market confidence about the coming months after the eye-watering fluctuations in short-term rates in the last few weeks, which were partly due to the bum steers of the top central banks around the globe, is low.

This week saw what Rob Carnell of ING called a cacophony’ of speeches from central banks that did little to clarify the bigger picture of “messy” markets, but do much more than encourage divergence or volatility.

Jerome Powell, Federal Reserve chair, struck a cautious tone when he said the Fed will be assessing the labour market disparities and not just the headline employment figures.

However, his coworkers still use very different hymn sheets. Fed vice president Richard Clarida stated Monday that conditions may be set for raising interest rates by 2022. St Louis Fed chief James Bullard also agreed with the markets, stating there would be two rate increases by then. However Charles Evans of Chicago Fed doesn’t anticipate one before 2023.

This assumes that investors are able to judge the Fed’s mood from the current hot seat. The Fed’s chair will still be vacant when Powell’s term expires next February. Randal Quarles, the top bank supervisor, resigned this week. There are at most two seats that remain vacant for next year.

The Fed’s international peers appear to be on similar fractious tracks, despite being faced with the same inflation and job conundrums.

Officials from the European Central Bank have resisted market pricing of a slight ECB rate increase next year. Chief economist Philip Lane was at the forefront this week, insisting that higher rates could prove counterproductive.

Isabel Schnabel from the ECB Board stated that they cannot ignore surging home prices. Andrea Enria (supervisor at Bank of America) stressed however, that low interest rates have more negative effects on bank margins than they do for lending volume.

Andrew Bailey, Faith in Bank of England’s chief speech-maker, was, however, buried below the waterline after spending a month convincing markets that a UK rate increase was possible. He voted against it at Thursday’s meeting. He insists that tighter credit is not going to stop supply-distorted inflation spikes, but he still points to higher rates.

TOSSING COIN

The return to basic models of how interest rates should look at the end, or terminal rates, provides some stability for the bond and currency market.

However, even this presupposes that the centrally-mandated global recession & bounce-back over the last 18 months are anything like any other cycle.

There is no agreement on the best way to go from this point.

JPMorgan (NYSE -) conducted a survey with its clients to find out if central banks and markets are correct when they predict interest rates over the next year. It got a split of 50-50, just as it did with other questions about equity and bond positioning.

It’s more than a matter of clarity.

Many people envy the dilemma of central banks. Too soon and central banks risk stopping the recovery from maturing; too quickly and the risk of a currency crisis; jumping the gun on countries will increase the risk; do nothing, and inflation could become entrenched.

Jupiter’s Fixed income Alternatives’ Mark Nash believes the Fed is in an “unenviable” position and must choose “economic price stability or equity price stability”.

This dilemma is compounded by the warnings made this week by the central bank’s financial stability units that excessively easy money could lead to bubbles in all areas, including equities and crypto tokens.

How can investors make a difference? Most investors seem to just be looking for ways to stay long in equity and buy inflation-protected bonds.

Inflation-protected bond yields have been sinking to record lows that seem never ending. Now, inflation-linked bond yields have fallen to -1.1% in America, -2.0% in Germany, and -3.2% here in Britain.

Sonal Desai, Fixed Income CIO at Franklin Templeton thinks that it will all come down to how fast returning workers can stop temporary inflation spikes from seeding a wage spiral. However, she acknowledges it could be more difficult to evaluate than what the markets can bear.

Investors should prepare now for slowing labour supply, rising inflation, and increasing financial volatility.

(by Mike Dolan. Twitter (NYSE:).: @reutersMikeD. Editing by Mark Potter