Blog # 7 Contingent Inflation Across Major Economies

Contingent Inflation Across Major Economies

This week's economic data unveils an undeniable acceleration in economic growth and robust labor market participation, highlighting the enduring strength of major economies including the USA, Eurozone, China, Germany, and Korea.

In an intriguing development, several Reserve Bank Presidents have signaled a notable shift in policy direction. Initially, there was an anticipation of seven rate cuts within the year. However, this perspective has recently been adjusted, with the forecast now suggesting up to three rate cuts. It's crucial to remember that the Federal Reserve operates as an apolitical entity. Historically, it has steered clear of initiating new policies within six months of the U.S. presidential elections.

To provide a clearer picture, let's delve into 10 key economic indicators that have shaped recent discussions:

1. China Exports (Feb) saw a significant jump to 10.30M (CNY) from 3.80M (CNY) in the previous month, with year-over-year growth for February hitting 7.1%, surpassing the 1.9% forecast.

2. China Imports (YoY) (Feb) also exceeded expectations, recording a 3.5% increase against a forecast of 1.5%.

3. Foreign Investments in Japanese Stocks stood at 283.9B, marking a shift from the previous period where foreign investors were net sellers at 206.3B.

4. Foreign Japanese Bond Buying reached 484.6B, in contrast to the previous phase where there was a net selling of Japanese bonds amounting to 250.1B.

5. Japanese Average Cash Earnings rose by 2.0%, outperforming the 1.3% economic forecast.

6. The USA Atlanta Fed GDPNow (Q1) estimate is 2.5%, higher than the 2.1% forecast.

7. USA JOLTs Job Openings exceeded expectations, registering at 8.863M.

8. USA Mortgage Applications (WoW) observed a 9.7% increase, compared to 5.6% in the preceding period.

9. German Exports (MoM) (Jan) surged by 6.3%, vastly outpacing the 1.5% increase forecasted by economists.

10. German Imports (MoM) (Jan) also saw a substantial rise of 3.6%, against a forecast of 1.8%.

These indicators not only underscores the robustness of global economic activity but also challenges the conventional understanding of inflation dynamics. As previously analysed, inflation is poised to remain a key concern into Q2,.

The evolving narrative around interest rate cuts by various Reserve Banks underscores a strategic pivot in response to global economic signals.

Written by : Associate Professor Mordechai Katash

Blog #5: Eurozone Economy Witnesses Inflationary Trends

In recent discussions, I have highlighted the signs of an accelerating inflation rate within the US economy. Notably, January's Personal Income data revealed a monthly surge of 0.7%, surpassing forecasts by 0.6%, while the number of initial Jobless Claims stood at 215K. This comes as the Reserve Bank of New Zealand hints at an upcoming rate hike, signaling tightening monetary conditions.

The market's expectations have undergone a significant shift. A month ago, analysts were predicting seven rate cuts, totaling 175 basis points. However, current sentiment has adjusted to anticipate merely three rate cuts, equating to 75 basis points. This adjustment stems from the rapid pace of economic data, suggesting that rate cuts may be off the table until at least the third quarter of 2024.

Turning our gaze to the Eurozone, the latest figures illustrate the region's inflationary momentum. A closer look at the data reveals:

• The Core Consumer Price Index (CPI) on a month-to-month basis stands at 0.7%, a stark contrast to last month's -0.9%.

• Year-over-year, the Core CPI has risen to 3.1%, marking a 0.2% increase from the previous month's figures.

• The monthly CPI has climbed to 0.6%, showcasing a significant jump of 1.0% from last month.

• On an annual basis, the CPI has increased to 2.6%, up by 0.1% from prior data.

These inflationary pressures are not occurring in isolation. With the backdrop of rising energy costs, including crude oil (WTI and Brent) and expected cyclical and seasonal spikes in natural gas prices, the Eurozone is aligning with economies like U.S.A. and New Zealand. These regions are navigating the complexities of inflation, spurred by both base effects and rising energy prices.

Associate Professor Mordechai Katash

Blog #4: Low demand for U.S. Treasury

As we anticipate the forthcoming release of key economic indicators, including this week's Gross Domestic Product (GDP) and inflation figures, there is a palpable increase in the level of uncertainty permeating the global investment community.

Our analysis of current financial trends, encapsulated by the Smart Money Index, reveals a prevailing expectation among investors of heightened inflationary pressures. This sentiment is poised to exert a consequential impact on the global economic panorama.

Observations from today's U.S. Treasury auctions, particularly concerning the 2-year and 5-year notes, reveal a pronounced inclination among institutional investors to demand greater yields in exchange for debt acquisition. This behaviour underscores a broader trend of caution prevailing in the market context, as detailed in the accompanying graphical analysis.

Furthermore, the current status of the 10-2 Treasury Yield Spread, standing at a negative 14 percent, signals a trend towards either a non-inverted or a flattening yield curve. Historically, such patterns have been precursors to potential economic downturns, warranting scrutiny.

On the commodities spectrum, we note immediate reactions among rate-sensitive assets. Specifically, Silver has registered a 2 percent decline, while West Texas Intermediate (WTI) crude oil has seen a 1.4 percent uptick. These fluctuations serve as critical barometers for assessing the commodity market's response to shifts in the economic climate, with further details expounded in the attached charts.

Associate Professor Mordechai Katash