A “Now Hiring” sign is seen at a WholeFoods store in New York City.
Adam Jefferies | CNBC
According to veteran strategist David Roche, the global economy is likely to avoid a recession and central banks need to change “the target posts” on inflation.
With high inflation proving persistent in many major economies, central banks have tightened monetary policy aggressively over the past 18 months. Further rate hikes are expected later this year given the tight labor market and robust economic activity.
This has led a growing number of economists to believe that the additional rate hikes will plunge several major economies into recession, with some even suggesting that a downturn may be necessary to match the levels of demand annihilation and unemployment leading to a would lead to disinflation.
The market expects the Federal Reserve to raise interest rates again by 25 basis points later this month, although weaker-than-expected CPI inflation in June on Wednesday fueled optimism that prices are finally softening.
Roche cautioned that the Fed will be reluctant to cut rates from their current elevated levels well into next year as the numbers begin to reflect year-on-year comparisons after prices rose in the wake of the Russian invasion last spring Ukraine had suddenly risen.”
“I think a real fear is that they will cut too soon and could be the cause of a second higher inflation. So I think they’re more likely to stay the course,” said Roche, a veteran investor and president of research house Independent Strategy.
“Will this lead to deflation, will this lead to recession? I don’t think so, actually, and the reason is that labor markets and disposable income – what people have to spend – are behaving differently this time around.”
The year-on-year inflation rate fell to 3% in June from 4% in May, mainly due to falling energy and transport prices, while core inflation – which excludes fluctuating food and energy costs – slowed and rose just 0.0% on the month. 2% rose. in the month. Annual core CPI remained comparatively high at 4.8%.
Roche, which correctly predicted the trajectory of the 1997 Asian crisis and the 2008 global financial crisis, noted that the global economy is currently experiencing a “gradual decline” in labor demand and a “gradual decline in hourly wages,” but not the “catastrophic job slump that a would trigger recession.”
Contrary to the oft-cited “Goldilocks scenario” in which borrowing costs fall and growth accelerates, Roche says the global economy is facing a period of static growth with persistently high interest rates. He said this raises the question of how to bring inflation back towards the Fed’s 2 percent target without “a long period of pain”.
“Or just change the target posts or change the target posts without really saying it, which I think central banks will do?” he added.
No chance of “flawless disinflation”
The rejection of any possible “Goldilocks” scenario for the global economy was confirmed by earlier this week JP Morgan Asset management, but for different reasons.
Stock markets and other risky assets rallied on Wednesday on cooler US CPI data, posting a record first-half result despite lingering concerns that central banks will have to further curb growth to curb inflation.
The S&P 500 is up more than 16% year-to-date while the technology focus Nasdaq 100 has increased by almost 40%. Gains were more modest in Europe and Asia, with pan-European markets affected Stoxx 600 up more than 8% and the MSCI Asia ex Japan almost 3% higher.
At a roundtable event on Tuesday, Hugh Gimber, global market strategist at JPMorgan, said current market positioning is based on an economic outlook that is “too good to be true,” with investors less prepared for the “necessary” slowdown , “which the central banks have decided”. to reach.”
“We are skeptical of this notion that we can see what I would call flawless disinflation. We do not believe that core inflation will bounce back towards target without hurting growth significantly and as such are unhappy with a fall in inflation in markets and therefore a recession could potentially be avoided,” Gimber said.
He added that unless the global economy weakens, core inflation will not reach levels that central banks can bear.
“As such, we expect to see more volatility based on the market movements we’ve seen in the first half of this year,” Gimber said.
“We believe that the total returns of all risk assets on a 12-month forward basis could eventually come under significant pressure and as such, now is the time for investors to focus on portfolio resilience.”