Investors and consumers in much of the world are in a state of deep pessimism, but Kristina Hooper sees reasons for optimism and highlights seven of them.
Kristina Hooper, Chief Global Market Strategist, Invesco Group
Highlights
- Global supply chain pressures are easing
Global supply chain pressures, while still high, are easing in part due to improved supply delivery times in China.
- There are some bright spots in recent inflation data
While overall U.S. inflation rose last month, I see some optimistic points in the recent data.
- Positive economic signals emerged in China
China's economic growth was lower than expected in the second quarter, but it rebounded strongly in June.
has mentioned before in blogs and media interviews that I find the current global market environment to be too pessimistic. After all, two years ago, we were in the throes of a global pandemic, and we were not sure whether an effective vaccine against COVID-19 could be developed. More Needless to say the short-term sentiment at the time. Our situation today is very different. Of course, today's environment of high inflation and aggressive monetary tightening by central banks in many developed markets is not ideal, but I think it is much better than it was two years ago. However, not many people seem to realize this, and consumers, businesses and financial markets in most parts of the world are in a very pessimistic state. I thought it might be helpful to provide a few reasons for optimism in this environment, and here are seven reasons to be optimistic in the current environment.
1. Global supply chain pressure is easing
According to the Global Supply Chain Stress Index, although global supply chain pressure is still high, it has decreased in the past seven months. Last month's decline was mainly due to improved supply delivery times in China. This suggests that at least one source of inflationary pressure is easing.
2. Commodity prices are falling
Although commodity prices are still at a high point, they are also falling. The Goldman Sachs Commodity Index has dropped 19.92% from the high point on March 8 this year①, and the Bloomberg Commodity Index has dropped 16.94% from the high point on June 9①, which indicates that at least one source of inflationary pressure is going on. ease. Additionally, this should slow the growth rate of the goods component of the U.S. Producer Price Index (PPI), which of course lags somewhat, but also suggests that goods inflation may be easing soon.
3. There are some bright spots in recent inflation data
Although the overall U.S. Consumer Price Index and Personal Consumption Expenditures Index (PCE) both rose in the latest report, the core CPI and PCE actually increased (excluding food and energy prices). ) has declined slightly recently②. Although last week's PPI data was higher than expected, there are still some positive points, with the service industry PPI rising only 0.4% monthly③. The services demand index was flat in June after rising seven times in a row③, suggesting that service sector inflation may ease in the near future.
4. U.S. long-term inflation expectations are good
According to a survey conducted by the University of Michigan last week, inflation expectations for the next five years fell to 2.8% from 3.1% last month④. The New York Federal Reserve Survey of Consumer Expectations released earlier last week showed similar results, with the New York Fed survey showing rising inflation expectations for the next year and falling expectations for the next five years, as did the Michigan survey. In addition, inflation expectations for the next three years have also dropped significantly from 3.9% in May to 3.6% in June⑤. The two surveys helped confirm that long-term inflation expectations are within reasonable limits and have improved slightly, allowing the Fed to avoid tightening monetary policy so sharply that a recession would ensue.
More specifically, this suggests that the Fed is unlikely to raise rates by 14100 basis points at its next meeting; 75 basis points seems more appropriate to me.Canada’s inflation expectations are the opposite. The Bank of Canada’s most recent consumer expectations survey showed that inflation expectations for the next five years rose from 3.23% in the first quarter to 4% in the second quarter. This helps explain why the Bank of Canada It was deemed necessary to raise interest rates by 100 basis points.
5. Positive economic signals emerged in China
China’s economic growth was lower than expected in the second quarter, but it rebounded strongly in June. Due to the prevention and control of the new coronavirus Omicron, China's gross domestic product increased by 0.4% annually in the second quarter⑦, but after the relaxation of epidemic prevention restrictions, growth generally rebounded in June. In the second half of the year, the economy is expected to continue to recover, driven by industrial production and infrastructure investment, with the support of growth-promoting policies.
6. The epidemic situation in China has improved
Cities across the country have reopened and economic activity is improving. China's epidemic prevention policy has been improved and adjusted. This means that if the number of infections increases, small-scale management will be carried out, such as communities. This policy, coupled with daily COVID-19 testing, allows policymakers to quickly stamp out infections as they arise and prevent widespread spread.
7. When pessimism permeates the market, positive surprises are more powerful
Stock markets have taken a beating, but that doesn't mean there won't be further declines in some global stock markets, especially given that profit expectations are likely to be revised downwards. But I think now is the time to be closer to the bottom and any positive stimulus in the coming months is upward momentum.
Contributors: Tomo Kinoshita, Arnab Das, David Chao and Brian Levitt
References
①Data source: Bloomberg, as of July 15, 2022
②Data source: Bloomberg, Macrobond, Invesco. Overall inflation is June data, core inflation is May data, as of July 15, 2022
③ Data source: U.S. Bureau of Labor Statistics, as of July 14, 2022
④ Data source: University of Michigan Consumer Survey, as of 2022 July 15
⑤ Data source: New York Federal Reserve Consumer Survey, as of July 11, 2022
⑥ Data source: Bank of Canada Consumer Expectations Survey, second quarter 2022, July 4, 2022
⑦ Data source: National Bureau of Statistics of China (National Bureau of Statistics). Data as of June 2022
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