Deglobalisation Deglobalisation Deglobalisation

Deglobalisation will accelerate and impact inflation

PG
Peter Garnry

Head of Equity Strategy

Summary:  The war in Ukraine and the issues over Taiwan will drive deglobalisation and self-reliance systems across the global economy which will likely add to inflation longer term. This is an important trend to understand because it will impact interest rates and equity valuations. We put deglobalisation in the context of Mester's comments yesterday that inflation may not have peaked and we also criticize the core inflation paradigm.


The pendulum swings back

US House Speaker Nancy Pelosi’s visit to Taiwan will accelerate deglobalization in the years to come causing a huge adjustment to the global economy. Immediately after the visit China forced CATL to halt its $5bn battery plant in North America which was supposed to supply Tesla and Ford in their EV push. In consumer electronic, Motorola has pulled the launch of two products in the developed world and China has halted export of natural sand to Taiwan which is a key ingredient for semiconductor manufacturing. These moves show that China is retaliating and it wants to impact the US where it hurts. Besides Taiwan the moves could also be seen as payback for the recently passed US CHIPS Act which is set to build up US domestic semiconductor manufacturing and constrain South Korean and Taiwanese manufacturer to expand production in China.

China’s self-reliance policy is part of the current five-year plan and is a response to the trade war with the US. In many ways the self-reliance ecosystem through the Silk and Road programme was already in motion but now it was formulated into the five-year plan. The US CHIPS Act is a self-reliance policy of the US and Europe’s energy independence from Russia after the war in Ukraine is a self-reliance policy. The issues over Ukraine and Taiwan will most likely accelerate deglobalization and decouple a large part of the global economy and political system into two blocs.

Globalization was the major driver behind lower inflation in the developed world and thus deglobalization would likely mean higher inflation going forward as production shored back to Europe and the US is more expensive. In a deglobalization note from March this year we also highlighted Vietnam as winner in Asia from global supply chains being reconfigured. Self-reliance systems also means less just-in-time and more buffers which means more investments going forward and higher commodity prices as a result. Self-reliance systems also mean more renewable energy and thus this is a good theme for portfolios in the long-term.

Mester says inflation is still an issue

Staying with the inflation theme, Cleveland Fed President Loretta Mester said yesterday that inflation may not have peaked yet and there is more work for the Fed. Inflation has not moved down yet when observing m/m figures in the Fed’s preferred inflation measure, the PCE Core SA Index. As the chart below shows, the 6-month average core inflation rate is around 0.4% which is around 5% annualized inflation excluding energy and food. The Fed is likely looking for the 0.2% m/m over a sustained period before it scales back tightening. Another potential big policy mistake is for central banks to focus only on core inflation, because it assumes that energy and food are highly competitive global markets that adds zero inflation long-term but just volatility to inflation rates. Climate change and self-reliance mean that this assumption might be catastrophically wrong.

Mester’s comments yesterday lifted the entire US yield curve which surprisingly did little damage to equities with S&P 500 futures closing just below the 4,100 level and already today US equity futures are moving higher again suggesting momentum maybe has more leg. As we explained two days ago, we are still leaning statistically towards a pullback and Mester’s comments square with the market being too optimistic on the Fed Funds Rate in the first half of 2023.

PCE Core SA m/m | Source: Bloomberg
S&P 500 futures | Source: Bloomberg
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 is not intended to and does not change or expand on this. 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/legal/disclaimer/saxo-disclaimer)
- Full disclaimer (https://www.home.saxo/en-mena/legal/disclaimer/saxo-disclaimer)


Boulevard Plaza, Tower 1, 30th floor, office 3002
Downtown, P.O. Box 33641 Dubai, UAE

Contact Saxo

Select region

UAE
UAE

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.