![]() ![]() If it doesn’t, and I fear that it may not given now structurally looser fiscal policy, we are in an altogether more difficult situation. If inflation levels out at a pace more or less consistent with central banks’ target, without recessions, we have achieved a soft landing. As I have discussed in recent posts, the pace at which inflation levels out - which should happen in the first half of 2024 - is a key swing factor for the policy mix next year, and probably in 2025 too. In the economy, the next key milestone will be when and where inflation stabilises. I think this can go on for longer than many expect. I wouldn’t want to bet against either of these outcomes at this point, which is perhaps why the net outcome is what we’re currently seeing on our screens a market locked between inflation-curbing downside risks to growth, and nominal-growth boosting upside risks to inflation. Either growth breaks lower, forcing markets to shift their focus to recession economics and price action, or inflation risks re-emerge, forcing central banks to re-tighten the monetary policy vice. In the case of the former, China is serving up exactly the right medicine for markets.Ĭhina Is Cooling Not A Bad Thing For The Global EconomyĪlmost by definition, a market rally propelled by Goldilocks sentiment and conditions is an unstable equilibrium. The Chinese post-lockdown recovery has been disappointingly weak, but at this point I am inclined to argue that this is a net positive for markets, which are still more inclined towards buying a decline in inflation rather than selling a shortfall in economic growth. ![]() ![]() Employment growth - which is key for Fed and market sentiment on the economy - has slowed, but is still robust overall. Similarly in the US, recession calls have so far had to be postponed. In Europe, the UK and eurozone economies have stalled, but a severe downturn has so far been avoided, and labour markets remain resilient. Granted, this shift is barely noticeably in any of the major economies, except via the absence of the downturns that many economists were expecting at the end of last year. This index has clearly rebounded in the past six months. The chart below plots my diffusion index of leading indicators, which captures the net number of indices - using the OECD’s amplitude-adjusted data - that are rising from a position above or below their long-run average. The global composite PMI has rebounded to well above 50, from a nadir of around 48 in the fourth quarter of last year, and growth in the CBP’s global industrial production and trade indices have improved too at the start of the second quarter. In fact, coincident and leading indicators suggest that downside risks to global economic growth have faded in the past six months, even as inflation has cooled. The economic backdrop to this downshift in inflation pressures remains lukewarm, which is exactly what markets like to see. It plots two composite indices of price pressures in manufacturing and services - survey-based and the Chinese PPI in manufacturing - which are both rolling over.Ĭlear Evidence Of Further Disinflation In The Surveys The second chart adds to the positive vibes. The first chart below shows that headline inflation in the US, UK and euro area has more than halved since peaking just under 10% last year, and core inflation - which has been keeping central banks on their toes - is finally breaking lower too. The reaction to the UK inflation data was particularly pronounced, one of relief even, despite the fact that the headline and core both remain uncomfortably high for the Bank of England. Moreover, and more importantly at this point, the June inflation data were downside surprises after a string of upside surprises through most of 2023. These numbers don’t exactly scream Goldilocks, but markets trade at the margin of the economic data it is the direction of travel that matters. In the UK, meanwhile, headline inflation slipped to 7.9%, from 8.7% in May, while core inflation dipped by 0.2pp, to 6.9%. Headline CPI inflation in the US fell to a two-year low of 3.0%, with core inflation dropping by 0.5pp to 4.8%, a 20-month low. Soft US and UK inflation reports for the month of June have been key catalysts for the change in mood. This is a story about two trends easing inflation and economies which are, well. Markets have a distinct Goldilocks feel about them at the moment, or, in the words of the FT’s editors, markets are beginning to eye the “immaculate disinflation”, which is a prerequisite for a soft landing. Someone has to say it, and it might as well be me. ![]()
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