Last week, Danske Bank, a leading bank in Denmark, openly started to comment on what would be disastrous for the world economy.
After seeing and analyzing a fresh batch of macro-economic data, Danske Bank now thinks there are an increasing amount of signs the global business cycle is peaking as the US car sales and US personal spending fell short of expectations. The so-called ‘Trump factor’ (or ‘Trumpflation’) is losing steam, and perhaps even more important, the rate hikes we recently saw in the USA already have a huge impact on the American economy.
Whereas we saw the ‘reflation theme’ gaining ground last fall when the US inflation numbers were closing in on the official target of 2%, the inflation will very likely start to come off in 2017 as the commodity-related inflation will decrease as well. After all, 2016 was the year wherein the oil price increased by in excess of 50%, and the higher energy prices were one of the main contributors to the total inflation number.
Source: stockcharts.com
As the oil price is now still trading in a range of $46-55 per barrel (and will very likely stay there), the inflational pressure caused by the commodity sector will most definitely be much lower than last year. As you can see on the next image, there’s a really interesting (but logical) correlation between the oil price and the inflation rate and inflation expectations in both the Eurozone and the USA. The oil price has been relatively steady (sure, there are peaks and bottoms, but nothing in the magnitude of last year’s huge oil price surge), and this means the inflation rate will also level off.
Source: Danske Bank
This theory is actually also confirmed in the bond markets. The past few days, several news outlets have been reporting on a huge inflow in the bond markets. After a total of approximately $40B was pulled out of bonds, investors are re-gaining interest in debt securities. According to the Wall Street Journal, whose reporting has always been credible, in excess of $100B has been pumped back into fixed income funds, whilst $180B found its way to junk bond issuers – and this is perhaps one of the most worrisome updates we have heard in a while. This means investors are losing their confidence in a continuously buoyant stock market, and a stunning $2.5B was invested in high-yield funds and ETF’s in the first week of April. And that’s the highest cash inflow in more than three months.
