Although the ECB head's speeches have little to do with the US stock market, she also made several important statements at the economic summit in Portugal. Christine Lagarde said that the world economy is likely to return to a "low-inflationary environment" very soon. She was talking about how the "economic landscape", which has changed a lot in the last 2.5 years, first because of the coronavirus pandemic, and then because of the geopolitical conflict in Ukraine, is now completely different. The global economy needs to learn to live by new rules. If we translate her statements into simpler language, Lagarde does not believe that inflation will be able to return to 2%. Or at least it will happen in the next year or two. Perhaps she meant only the European economy since we all see that the ECB is frankly in no hurry to raise rates, and is also much more worried about a possible recession. Nevertheless, we recall that a year ago no one could have imagined that inflation would rise to 40-year highs, and Jerome Powell and Lagarde herself had been "fed breakfast" for a long time that high inflation was a temporary phenomenon. Now Lagarde says that the energy crisis has already begun, and high energy prices will remain so for a long time. Thus, what the head of the ECB was counting on when she predicted a weakening of inflation without the intervention of the regulator, it seems, will not come true.
What is Lagarde's speech about? First, high inflation is now a widespread problem, since oil and gas prices are high everywhere, and supply chains are disrupted all over the world. Second, everyone will fight inflation in the available ways. If the Fed can afford to tighten monetary policy aggressively, then, for example, the ECB cannot. Consequently, in the future, a situation may arise in which interest, credit, and deposit rates in different agglomerations may differ very much from each other. This will cause a flow of capital from one market to another, which will lead to serious changes in both the foreign exchange and stock markets. How does it work? The Fed raises the rate to 3.5%, and the ECB - to 0.5%. Consequently, deposits are much more profitable to place in the United States, and American Treasury bonds will give a much higher yield. In addition, high rates in the United States will extinguish inflation at least partially, so the yield on American investments will depreciate more slowly than on European ones. Naturally, with this state of affairs, an additional flow of capital from the EU to the USA may begin to be observed. At the same time, loans will be more profitable to take in Europe, where rates will remain low. In general, changes, redistribution, overflow. The world economy will have to adapt to the new reality for a long time. And what, how, and when the geopolitical conflict in Eastern Europe will end, it's hard to even guess now.
