Head of Macroeconomic Research
Summary: In July, U.S. ISM price components (which refers to both delivery times and prices) have dropped for the first time in twelve months. Are we seeing the first signs of peaking U.S. transitory inflation?
Our underlying view is that supply constraints look set to continue in coming quarters, as will price pressures and labour shortages. As a result, inflationary pressures could prove to be more persistent than commonly expected. The below chart is a warning to all investors that U.S. inflation has likely not peaked yet.
In the chart below, we show the relationship between U.S. core inflation and the underlying inflation gauge of the Federal Reserve of New York. The tracker was created in 2019 and aims to reconcile macroeconomic data and financial variables to better measure and forecast the evolution of inflation. If you wish, you can access the full data set and understand the methodology here. We find a high correlation of 0.7 between the tracker and core CPI, with the tracker leading core CPI by a little over a year. The correlation suggests that U.S. inflation has likely not peaked yet. The peak is expected to be reached in the first quarter of 2022. If inflation runs uncomfortably high in coming months as suggested by the tracker, expect the Federal Reserve to eventually accelerate tapering timelines.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
