Goldman: Lessons From Abroad; Extrapolate With Care

Goldman Sachs note that “there has been a succession of central bank downshifts in recent weeks, adding to the “peak hawkishness” theme running through macro markets.”

• “We think investors should be careful not to over-extrapolate this theme, and it is possible that we will look back on this period as the start of policy divergence rather than a synchronized policy turn.”
• “Other central banks making this downshift face an arguably less difficult inflation and activity trade-off (for example, inflation is lower in Canada than the U.S., and the Euro area is likely entering a recession already). And, even still, they are having difficulty slowing down against a tide of strong inflation data - there is a good chance that the RBA will have to dial up the pace again after an inflation surprise, and the ECB’s guidance reads a little less dovishly in the light of the next day’s very firm inflation and GDP reports.”
• “These lessons seem especially relevant for the U.S., where our economists continue to see lower odds of recession and underlying inflation is still uncomfortably high.”
• “The recent easing in financial conditions, coupled with a slower pace of hikes, could ultimately extend the cycle at a pace that other central banks still likely cannot match.
• “Although the near-term outlook could still prove challenging for USD bulls, we think it will likely be a couple quarters before we see a more sustainable peak in the Dollar.”