12 to 18 June: Hope Springs Eternal

Since the financial crisis, there has been much discussion of “secular stagnation” or a “new normal” for the global economy, with lower growth and inflation. Last year, a commodity rally sparked a brief move higher in headline inflation. However, outside a few special cases mostly related to currency weakness (like the UK), measures of core inflation have struggled to move higher.

Central banks remain resolute that price pressures are just around the corner. With unemployment at multi-decade lows in the US, the FED are using the “Philips Curve” as their anchor (that there is an inverse relationship between the level of unemployment and the rate of inflation) and raising rates ahead of a potential surge in wages.

Markets, however, are more sceptical. Despite 3 rate hikes in 6 months, the US 10-year is 0.5% lower in yield (this week the 10-year hit its lowest yield since the Presidential election at 2.10%). Similarly, whilst the FED is clearly guiding a further rate raise this year as part of an ongoing cycle, futures markets price only a 40% chance of another hike before January and less than 2 hikes over the next 2 years. Commodity markets too are refusing to stick to a bullish regime. Oil prices were again lower last week, extending their longest run of weekly losses since August 2015.

In fact, although the central banking fraternity believe tighter labour markets are going to prompt higher inflation over the coming months, they appear to acknowledge that their current mandates (in US/Europe/Japan/UK encompassing a 2% inflation target) may leave insufficient room to stimulate long-term growth. During the FED’s press conference, Janet Yellen said the question of raising inflation targets was “one of the most important questions facing monetary policy.” In short, although the global economy currently has some decent momentum, the underlying weakness in the developed market story still lurks in the background.

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