Head of Macroeconomic Research
Summary: Saxo Inflation Monitor is a new publication that tracks various forms of inflation and price trends in order to forecast the evolution of inflation and the potential market impact.
We intuitively believe that the rise in protectionism is fueling higher inflation. While there is evidence of price spikes on products targeted by higher tariffs (such as the price of washing machine imports in the United States), aggregate inflation remains low in most developed countries and even falls in many Asian countries.
The latest Chinese figures tend to indicate that China is starting to export lowflation globally again. Chinese CPI for non-agricultural products is up only 1% YoY while the PPI is collapsing to minus 1.2% YoY from minus 0.8%. The outlook is not as bad as in 2015, when China has massively exported deflation to trade partners, but should economic situation continue to deteriorate, the risk of outright deflation would increase significantly.
In the United States, the main measures of inflation confirm that it is close to target. Based on an annual percentage rate, CPI is standing at 1.7% YoY in September, PCE is at 1.6% YoY in August and PCE excluding food and energy is at 2.4% YoY the same month. Inflation is notably supported by a healthy job market and still improving wage growth.
However, these drivers may play a less important role in the coming months. In the chart below, we have plotted small businesses' plans to increase compensation, and the evolution of the employment cost index, which details the changes in the costs of labor. We find out a strong correlation of 0.8 between both series and that NFIB compensation plans lead by three quarters.
Based on the latest update, the net share of small companies planning to raise compensation in the next three months is moving downward, at 18% in September (down 7 points from the peak of this cycle reached in November 2018). It tends to suggest that inflationary pressures are slowly fading on Main Street and it could ultimately result in lower employment cost going into 2020.
The divergence between realized inflation and expected inflation has increased a lot over the past few months. The University of Michigan survey, the 5-year break-even inflation rate (chart below) and the Cleveland Fed survey all confirm an increased risk of de-anchoring of inflation expectations. The 5-year break-even inflation rate is close to its 2015-2016 low points when inflation was moving down due to the Chinese deflation. This divergence is intriguing because inflation expectations should normally be higher given the current headline inflation and commodity trends.
The evolution of the Fed’s “underlying inflation gauge” confirms that inflation expectations are going in the right direction and that inflation is doomed to fall in 2020. In the chart below, we show the relationship between core CPI and the new underlying inflation tracker of the NY Fed that integrates both macroeconomic data and financial variables (if you wish, you can access the full data set HERE). Not only does the “underlying inflation gauge” demonstrate high correlation of 0.7 with core CPI, but it also leads the former by a little over a year. This correlation suggests that inflation may be about to deceleration, which could be good news for the FED as it would leave more room to lower rates further to stimulate the economy.
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
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)
