Head of Macroeconomic Research
Summary: More than the slowdown in economic activity, which is well-reflected in very weak manufacturing sentiment, current level of inflation (both headline and core inflation) released for the month of July are particularly concerning and add to the case for new ECB action next month.
This is one of the charts that probably scares the ECB the most. More than the slowdown in economic activity, which is well-reflected in very weak manufacturing sentiment, current level of inflation (both headline and core inflation) released for the month of July are particularly concerning and add to the case for new ECB action next month. In his latest press conference, Mario Draghi made many references to “we don’t like it” when talking about the level of inflation.
Weakness of inflation is broad-based, even in Germany where HICP surprised to the downside, at 1.1% YoY in July. What is even more worrying is that PIIGS countries are lurching towards deflation again: Italy’s HICP was out at 0.4% YoY last month, and Spain’s HICP dropped to minus 0.7% YoY, the lowest level since July 2014!
The ECB is going to have to find some way of responding, probably by lowering the deposit rate by 10 basis point and relaunching QE at some point in coming months. However, as lowflation is foremost related to structural factors (we have pointed it out many times: notably ageing, new technology and debt), it is unlikely that a new round of easing will have a positive long-term impact on HICP. The ECB needs to rethink its mandate, which primarily focuses on maintaining price stability, and broaden it to new missions, such as fighting unemployment or financing the green transition. Nothing new, since it has been widely debated among economists and market participants over the past years but, at some point, the ECB will really need to tackle this issue. It is a matter of credibility.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
