Deflation Tsunami
By Robert Burrows - 25 May 2023
Inflation is one of the great economic debates and often leaves big economic thinkers at loggerheads. I am not a financial titan, but looking at the world from 100,000 feet, the conditions are in place for the world to see inflation heading meaningfully lower. For years, inflation has been too low for comfort for the world’s major central banks. Inflation remained elusive despite ultra-accommodative policy through negative interest rates and an eye-watering amount of quantitative easing (QE). It wasn’t until a pandemic that shuttered economies…
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Current Thoughts on IG
By Ben Lord
Of the three major regions I focus on, all present interesting opportunities and yields at the moment. However, they all have unique challenges. In the US, the aggressive hiking probably means that inflation will fall first, but also that an economic downturn is closest. In Europe, the ECB still has further to go with hikes and will surely one day have to start to sell down its large book of QE corporate bonds. In the UK, I see some relative cheapness compared to these regions, and the BoE is surprisingly dovish which may mean inflation stays higher for longer. If we can find names, as we can, that do not need to increase borrowing by the same rate as inflation, they are getting more credit worthy, not less.
Are BOJ now entering Team Transitory?
By Eva Sun-Wai
The risk of the BOJ holding off and letting inflation run hot for a while is one we’ve seen before. We saw central banks pushing this narrative in the US and Europe, focusing on non-core food & energy inflation, then being hit by persistent, sticky high service sector inflation amidst continuingly strong labour markets. Whilst the magnitude of Japan’s inflation problem definitely feels smaller, the risk of focusing on external influences and being complacent about stickier inflation feels very familiar. A challenge here is how the BOJ actually measures ‘sustainable 2% inflation’. They focus highly on the Shunto spring wage negotiations (that this year saw pay rises in big corporations negotiated at above 3%, the highest figure in 30+ years), but given these are annual, it’s hardly an explanatory data point. Broadly, wage growth remains firm and well above long-term trends.