Updated: Aug 24
With the press awash with fears of recession caused by runaway inflation and interest rates, I thought it would be helpful for our clients to take a look at the recent moves in various commodity prices and inflation expectations.
Contrary to much of what has been reported, there has been a significant downward move in commodity prices and inflation expectations over the last 2-3 months which may well dampen the interest rate outlook and substantially diminish the prospects of recession. The table below highlights the recent decline:
Further evidence of easing inflationary pressure has also been seen in:
The fertiliser market where prices have fallen -33% from April highs (Green Markets Index)
The container shipping market where the cost of a container has fallen -27% from the highs seen in September 2021.
The used car market where prices have fallen -6% from the peak in December 2021 (Mannheim Index)
The amelioration of inflation has also not been lost on the bond market where market-implied long term inflation expectations (as evidenced by the 5-year, 5-year forward breakeven rate) have declined substantially:
5-Year 5-Year Forward Inflation Rate
Source: Federal Reserve Bank of St Louis
It is also worth pointing out that the majority of Western Central Banks have a 2% long term inflation target. With inflation breakeven rates now approaching the 2% mark, could we be nearing the point where Central Banks start to consider their work is done? Such an outcome is certainly not discounted in equity markets and would also come as a positive surprise to those in the real estate sector anxious about recession.
Finally, there is some evidence that a disinflationary “bullwhip effect” is taking hold in the retail sector. Recent earnings reports from Target, Walmart and Gap have shown these companies are holding too much inventory having over-ordered (amongst the "Roaring 20's Euphoria") earlier in the year. This is likely to lead to discounting and downward pressure on retail prices in the second half of 2022, again undermining the case for interest rate rises.
Clearly the above is not a consensus view and certainly doesn't fit the dominant narrative in stock markets and the mainstream media. However the evidence is compelling and we wouldn't be surprised to see a change of sentiment and a subsequent rally in equities and to some extent real estate in the months ahead.
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