Global Daily – Global inflation subdued

by: Aline Schuiling , Fouad Mehadi , Han de Jong

Euro macro: Headline inflation moving into the direction of below 2% again – A number of eurozone countries has published preliminary inflation data for November, ahead of the eurozone aggregate that will be released on Friday 30 November. The individual country data shows that inflation declined on the back of lower energy price inflation. Still, they also reveal that the recent drop in oil prices has not yet fully translated into inflation, implying that the decline has further to go. To start with, in Germany HICP inflation fell to 2.2%, down from 2.4% in October. Detailed regional data show that this was due to a combination of a drop in the volatile inflation rate of package holidays (which should bounce back), as well as lower energy price inflation. That said, not all Germany’s region reported a drop in energy price inflation, suggesting that the pass-through of oil prices happens with a delay. The same seems to have happened in Belgium, where headline inflation stabilised at 1.8% in November. According to Belgium’s statistical bureau, the inflation rate of household energy rose, whereas that of car fuel declined. As household energy prices are often fixed a couple of times per year, the recent drop in oil prices will only have an impact at a later stage. Finally, in Spain the inflation rate seem to already include most of the impact of lower oil prices. The HICP inflation rate decline to 1.7%, down from 2.3% and according to the statistical bureau this was due to a drop in prices of household energy as well as a decline in the price of car fuel.

All in all, we think that the eurozone aggregate inflation rate fell from 2.2% in October to 2.0% in November, but the risks to this outlook seem tilted to the downside. Moreover, inflation is expected to fall further in the months ahead, as the impact of the drop in oil prices filters through with a delay. This should fit our longer term outlook for muted inflation in the eurozone. The 5y5y forward inflation swap – the favourite ECB gauge for inflation expectations – has dropped by almost 7bps since last week, albeit being relatively volatile – it does coincide with softer macro data we have seen recently. Taking everything into account, we judge that yields in the broader fixed income markets should come down gradually. We forecast 10y bund yields at around 25bps in the second quarter of next year, also on the back of our expectation that the ECB should start sounding more dovish going forward. (Aline Schuiling & Fouad Mehadi)

US macro: US inflation moving lower as well – US personal income and spending rose a robust 0.5% and 0.6% mom, respectively, in October. This underscores that the consumer spending side of the economy remains solid. The same report included crucial data on inflation. Headline and core PCE inflation amounted to 0.2% and 0.1% mom, respectively. Core PCE is the inflation gauge the Fed watches most closely. Having moved up from 1.4% yoy in August last year to 2.0% in July 2018, the pace of increase has now fallen for three months in a row and stood at 1.8% yoy in October. The data is in line with earlier released CPI data, which also showed no increase in inflation pressure. This is relevant, as it shows that there is no urgency for the Federal Reserve to raise rates more quickly or much further. The Fed is clearly feeling its way around to determine when they have done enough tightening. They realise that doing too much may push the economy into recession. If inflation were to accelerate, their hand may be forced to tighten policy more quickly. But these tame inflation numbers indicate that there is no rush and no pressure. This is supportive of our view that the Fed will soon end their tightening or at least pause. (Han de Jong)

2019 Global Outlook: Slower, but continued growth – We have published our outlook for the global economy today (see here). The key message is that economic growth has slowed globally in 2018, but that this conceals divergence between regions: Europe has slowed the most, Asia a little less so while the US economy has actually gained growth momentum. Looking forward, the big question is whether or not key economies will fall in recession before too long. Recessions are painful as unemployment shoots up, as well as corporate defaults, while they cause havoc on equity markets. Recessions are generally caused by shocks or excessive monetary tightening. Although we cannot forecast shocks, we think that excessive monetary tightening looks unlikely. As such, we expect that global growth in 2019 will be a little lower than in 2018, but not by much. Inflation will pick up a little, but nothing to worry about; Chinese policymakers are taking measures to support economic growth; and the worst of the tightening of financial conditions is behind us as the Fed is approaching the end or a pause to its tightening cycle, and currencies of emerging economies are set to regain some ground. The trade conflict and, to a lesser extent, Brexit are uncertainties that could cause more damage to the global economy than we are anticipating. (Han de Jong)