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Using the global BIS database, there are currently zero countries in the world with inflation below 2%, see chart below.
This fact raises the question whether US inflation is really something special driven by stimulus checks, higher unemployment benefits, and PPP loans.
Maybe the simple explanation is that inflation in the US is not driven by fiscal policy or even monetary policy, as our economics textbooks would say.
Instead, inflation went up literally everywhere in the world because of supply problems in the goods sector and in the energy sector. If this is the case, then inflation will soon come down once the supply chain problems in the goods and energy sectors have been resolved.
The bottom line is that with falling commodity prices and falling costs of transporting goods by container, truck, train, and air, we could see a sharp decline in inflation over the coming months. At least, the global nature of inflation seen in the chart below suggests that there is really nothing special about US inflation.
Source: BIS, Haver Analytics, Apollo Chief Economist. Note: Data till May 2022 (46 countries reported). The dataset includes the following 60 countries Euro Area, United States, United Kingdom, Austria, Belgium, Denmark, France, Germany, Italy, Luxembourg, Netherlands, Norway, Sweden, Switzerland, Canada, Japan, Finland, Greece, Iceland, Ireland, Malta, Portugal, Spain, Turkey, Australia, New Zealand, South Africa, Argentina, Brazil, Chile, Mexico, Peru, Cyprus, Israel, Saudi Arabia, United Arab Emirates, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Thailand, Algeria, Bulgaria, Russia, China, Czech Republic, Slovakia, Estonia, Latvia, Serbia, Hungary, Lithuania, Croatia, Slovenia, Macedonia, Poland, and Romania. See important disclaimers at the bottom of the page.
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Dollar Funding Stresses in China
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4099944
IMF: Sharing the Pain of a Potential Russian Gas Shut-off to the European Union
https://www.imf.org/en/Publications/WP/Issues/2022/07/18/Market-Size-and-Supply-Disruptions-Sharing-the-Pain-of-a-Potential-Russian-Gas-Shut-off-to-520928
BIS: Big tech interdependencies – a key policy blind spot
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Our set of daily and weekly economic indicators for the US economy is available here, and we are watching the ongoing increase in jobless claims very carefully, see chart below.
So far, the uptrend in these weekly unemployment numbers is not alarming, but any signs of faster softening in the labor market would begin to impact Fed thinking. Ultimately Fed communication later this year will change from “we have an inflation problem” to “we have a growth problem.”
Source: Department of Labor, Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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CFOs are less worried about their own business than they are about the broader economy, see chart below.
See important disclaimers at the bottom of the page.
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The United Nations is forecasting significant declines in the size of the working-age populations for Japan, Europe, and China, see chart below. This has important implications for consumer spending patterns, overall GDP growth, and the level of long-term interest rates in the US relative to the rest of the world.
Source: UN, Haver, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The risks are rising that sometime over the next three months, the Fed will go from “inflation is a problem” to “growth is a problem.” Once that happens, the FOMC will slow down Fed hikes, and this pivot from very hawkish to less hawkish will push down long rates. And once financial conditions move from tightening to easing, the dollar will begin to go down, see chart below.
See important disclaimers at the bottom of the page.
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The market is pricing that the Fed will begin to cut rates in the first quarter of 2023, and I think that view is correct. With inflation expectations well-anchored the Fed doesn’t need to keep the Fed funds rate elevated for several years the way it did in the early 1980s, see chart below. With reference to the dual mandate, the Fed will later this year begin to talk about how the downside risks to growth are intensifying, and those recession risks will ultimately outweigh the shrinking upside risks to inflation.
Source: FRB, BLS, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Why does your company not need to borrow money in the next 12 months? That is a question in the latest Fed/Duke CFO survey below, and 80% of companies respond that they don’t need to borrow because they have enough cash on their balance sheets. Only 10% of companies think that interest rates are too high. For more see here.
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European high yield spreads have been trading wider, driven by intensifying recession risks, but European equity implied vol has remained relatively subdued. The outlook for Europe is very worrying, and either equity vol has to increase or high yield OAS has to narrow, see chart below.
See important disclaimers at the bottom of the page.
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Blanchard and Summers: Bad news for the Fed from the Beveridge space
https://www.piie.com/publications/policy-briefs/bad-news-fed-beveridge-space
Just How Big Are Federal Interest Payments?
https://www.crfb.org/blogs/just-how-big-are-federal-interest-payments
Fed: The Increase in Inflation Compensation: What’s Up?
https://www.frbsf.org/wp-content/uploads/sites/4/el2022-18.pdf
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