"Rallying rates and commodities are derailing the goldilocks soft landing scenario. The uncomfortable combination of rallying oil and US long end breaking up is disrupting this equilibrium and triggering a rotation into the “persisting inflation & sticky rates” narrative, adding pressure on equities and valuations". (GS sales desk)
Rising oil = rising inflation expectations
Rising oil is pushing up inflation expectations.
Here comes the inflation re-acceleration
GS expects core CPI to reaccelerate (month/month) through January.
Higher for longer hurting EM
TS Lombard writes: "....the August YoY number surprised to the upside vs analyst expectations and exceeded that in July halting the trend of disinflation surprises that had prevailed since mid-2022". Blame food inflation and surging oil...
Source: TS Lombard
El Niño & inflation
"El Niño most directly affects consumer inflation as food and energy commodities prices pass through. Of late, inflation has been coming down across both developed and emerging markets....But inflation is still above central bank targets in most countries, hence a severe El Niño could be a headwind for policy normalization. Indeed, the central banks of Brazil and India reference El Niño risks on their forecast horizon" (Seth Carpenter, MS)
Is the decline in inflation sustainable?
While the Fed has continued to suggest that the current run of inflation isn’t a wage/ price spiral, the data makes that a little bit of a tough sell – at least where core inflation is concerned. Shown below, lagged (using a four quarter moving average) unit labor costs track closely to core CPI…going all the way back to the 70s. While both ULCs and core CPI have come off of peak on a Y/Y basis, they have much further to fall in order to reach levels the Fed might consider benign inflation. With labor market data still coming in fairly warm (debatably hot), this could be the key data to watch to make sure a decline in inflation is sustainable.
Inflation can re-accelerate too...
Perhaps not the best read-across to the "western world" but still....Turkey inflation has reaccelerated despite sharply increased key interest rates.
See TME's daily newsletter email above. For the 24/7 market intelligence feed and thematic trading emails, sign up for ZH premium here.