The cost of deglobalisation
View from the Trading Desk:
If anything, the start of the US-China ‘tariff war’ in 2018 should have fired a warning shot to the rest of the world that globalisation of trade—and with it, the disinflationary effect of cheap imports—is a fragile business. In the four years since, wave after wave of supply-chain shocks have come in the shape of the Covid-19 pandemic and Russia’s war with Ukraine. Disruptions to production and shipping out of China, coupled with sanctions on Russia, have manifested in higher prices or outright shortages across the board. Consequently, many governments have been made acutely aware of their inability to provide even the basic needs of their population—take the recent protests and political upheaval in Sri Lanka as a warning.
For sure, the outlook for global growth looks dire; China’s once unstoppable economy is faltering, with its Covid-Zero policy and property crisis causing a major drag on growth. Meanwhile, central bankers elsewhere are having to tighten monetary policy at an unprecedented rate to combat decades-high inflation. You might argue that recession is the price we’ll all pay to bring prices under control, but there’s a chance that inflation expectations become embedded into the economy, leading to 70’s style stagflation.
On a positive note, the Biden Administration has been actively discussing changes to US tariffs on China over recent weeks. Any move to facilitate trade between the two nations—and place a wedge between China-Russia relations—couldn’t come too soon. At the very least, it should take some pressure off the Federal Reserve, which is set to increase US interest rates by another 75bps this week. Economists at Bloomberg have even suggested that a full rollback of tariffs and ‘Buy American’ rules could shave 1.5% to 2.0% off inflation, currently sitting at 9.1% annually.
Bottom line: The question remains, are we in a ‘Globalisation blip’—temporary by nature of major geopolitical events? If so, nations might just look to diversify where they source goods and commodities in the future, moving away from reliance on China and Russia. While that probably means elevated prices for now, the alternative is surely far worse.
The week ahead
The Pound Index is up 0.50% over the past week following a fresh record high for inflation which hit 9.4% in June. Economists at EY are concerned that inflation could overshoot the Bank of England's 11% target for October, reaching as high as 15%. These fears have stemmed from the risk of a Russian gas shut-off and the continuation of pressured food supply chains from the war in Ukraine. Rishi Sunak and Liz Truss will have their first head-to-head debate tonight as talks around the inflation impact of the next UK Prime Minister heat up. The FTSE 100 is higher this morning, with the city calling for a shakeup of London's equity listing rules as the capital faces post-Brexit stagnation.
- The Confederation of British Industry (CBI) Industrial Order Expectations came in at 8 for July compared to 18 in June.
- The British Retail Consortium (BRC) Shop Price Index y/y for July is due for release this Wednesday; the June print came in at 3.1%.
- On Friday, Mortgage Approvals in June are expected to reach 65.0K versus 66.2K in May.
- M4 Money Supply m/m for June is also scheduled on Friday, with analysts forecasting a 0.7% increase following a 0.5% gain in May.
Despite an unexpected 50 basis-point hike from the European Central Bank last week and signals of more rate hikes to come, the Euro has struggled for a sustained move higher against the US Dollar so far. Strength in the Common Currency has been contained as uncertainty on whether the Transmission Protection Instrument (TPI) will be effective in preventing a blowout in peripheral bond yields. The criteria is heavily reliant on the target countries' public finances, and the ECB Governing Council could struggle to find justification to implement such measures. European shares were in the green this morning while Sovereign bonds sold off, pushing yields higher.
- German GfK Consumer Confidence for August is forecast at -28.9 versus -27.4 in July.
- On Thursday, the German preliminary Consumer Price Index m/m for July is expected to hit 0.6% compared with a 0.1% gain in June.
- The Eurozone will publish flash estimates for CPI and Core CPI y/y for July, with projections pointing to 8.7% and 3.9% readings, respectively.
- Preliminary Gross Domestic Product q/q figures for the Eurozone will also be released on Friday. Forecasts indicate a 0.2% gain in the second quarter of 2022.
US Dollar strength has abated over the last week, with the US Dollar Index down 1.5% as concerns that aggressive rate hikes by the Federal Reserve could create further economic pain. The latest Purchasing Managers' Index releases presented a worrying outlook for the US economy as Services moved well into contractionary territory at 47.0. Economic models by Bloomberg assign a 0% probability that US inflation will move below 4.0% in 2023—well over the Fed's 2.0% target as supply-side cost pressures are expected to persist. With US Consumer Sentiment at record lows, the tail risk of a demand collapse in the latter half of the year is certainly on the radar as stagflation could be a possible outcome.
- The Conference Board (CB) Consumer Confidence figure is expected to fall to 96.9 for the month of July, following a 98.7 print in June.
- The Federal Reserve will meet on Wednesday to provide its latest interest rate decision; the consensus is for a 75 basis-point hike.
- Advance GDP q/q for the second quarter of 2022 is forecast to come in at 0.5% versus -1.6% in the first quarter of the year.
- To close out the week, the Core Personal Consumption Expenditures Price Index m/m for June is projected to read 0.5% compared with 0.3% in May.
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