13 Jul 2023

The “transitory” supply-side forces that lifted inflation through much of the post-pandemic period are retreating. With supply chains almost fully healed, global shipping costs have plunged, agricultural price indices are down more than 20 percent from their highs, and in most industrialized countries, grocery costs are softening in month-over-month terms. Energy prices remain elevated relative to historical averages, but are down dramatically from last year. And consumer expectations are coming down in most regions. On the demand side, a powerful feedback loop remains in play, with aggregate nominal household incomes rising as persistent labour market imbalances put upward pressure on...

The pace of monetary tightening from major central banks is clearly decelerating, and rate hikes look likely to peter out almost completely by the early autumn, helping reduce overall policy uncertainty. Following a pause in June, the Federal Reserve looks likely move to the sidelines after delivering a final quarter-point increase at its July meeting, bringing rates to a 5.50-percent terminal level. The European Central Bank looks likely to follow a similar (but lagged) trajectory, with two half-point moves in July and September, followed by a shift onto a data-contingent footing. Investors currently have the Bank of England priced to...

After a long series of shockingly-positive data releases out of the United States, investors are suddenly more convinced that policymakers will succeed in pulling off an “immaculate disinflation” – in which price growth comes back to target without triggering a big rise in unemployment. Equity valuations, long-term yields, financial conditions, and consensus economic forecasts are all pointing to stronger conviction in a “soft landing” scenario, and a growing number of previously-bearish market pundits have pivoted, pushing recession forecasts into late 2024 and beyond. Currency markets have realigned, with the greenback following archetypal “smile” dynamics in falling against its counterparts in...

Growth through much of the post-pandemic period has defied traditional business-cycle analysis, and the noise-to-signal ratio in economic data remains extraordinarily high. Yet the sheer breadth and diversity of recession indicators that are currently flashing red in developed economies – inverted yield curves, tighter bank lending standards, weak manufacturing activity and depressed consumer confidence – would suggest that a deepening slowdown is underway. We think global growth rates will slow sequentially in the third and fourth quarters as the lagging impact of higher rates hits home and household demand continues to normalise relative to pre-pandemic levels. Corporate labour hoarding and...

The factors pushing volatility lower through the first half of the year are beginning to lose traction, and the list of outcomes that could topple prevailing market assumptions is multiplying: Long-term interest rates could yet revert higher if inflation rates remain elevated. A policy mistake could trigger a financial crisis or drive economies into recession more quickly than currently expected. A ceasefire in Ukraine could drive a reappraisal in global energy markets and lift the euro out of its malaise. An aggressive stimulus push from Chinese authorities might send commodity prices soaring. The artificial intelligence mania could reach new heights...