What a difference two years makes. At the Thanksgiving OPEC deal last year we were slapped in the face by the failure to deliver production cuts, sending oil into freefall and ultimately leading to the “Hands Up If You’re Not Easing” club, as central banks fell over themselves to pump up inflation. It got so bad that many moved into negative rate territory, let alone what had become the standard unconventional tool of QE. And now this year we have “OPEC in first joint oil cut with Russia since 2001”, sending oil shooting back up over $50 a barrel. Even without this, inflation had already started to rise. Here’s how underlying CPIs have been looking, with the red line marking when the ECB started to indulge in asset purchases:
All have been stable or rising, with the most notable at the bottom – Switzerland storming back from the precipice of despair! Still negative of course, but getting there. Meanwhile the one that stands out in the opposite direction is poor old Japan. An uptick recently but not enough to arrest the downward momentum. No wonder the BOJ don’t know what to do.
As all good economists know, however, it’s not supposed to be about the level of inflation now. It’s about what is expected for the future. Hence why central bank inflation targets are supposed to be 2-3 years down the line. For this, we look at inflation expectations – and just look at what has happened for both Eurozone and US inflation expectations:
A rather nice pick up in the past 6 months, even without the alleged Trumpflation boost, and even without a lasting agreement from OPEC keeping oil supported. Taking this further, we can see that EUR/USD has tracked the relative performance of these inflation expectations:
So even as Mr Trump and his new team takes centre stage – with new Tsy Sec calling for 100yr Treasury issuance and the new Commerce Sec calling for “punitive tariffs for people who dump” – let’s not forget that inflationary momentum was already in place. True, those new policies might turbocharge it, as would a market who still doesn’t believe OPEC won’t renege on their deal… but it’s your judgement call on the likelihood of those outcomes. Blondemoney tries to stick to the facts, ma’am.
The bigger question is whether growth can accompany this reflation. Blondemoney is an optimist about that. But with US 10yr Tsys hitting 2.50% yesterday, are we sure that there’s enough growth in the pipeline for this to be 75bps higher than it was pre-Trump? Or was it just a necessary correction for a word where lower-forever had become too much of a one way bet….
and we haven’t even mentioned the Italian referendum! More on that tomorrow