020518 CGI Weekly Global Equities Strategy Update
The return of inflation?
Last week, central bankers and investors around the world started to be concerned with inflationary pressures, which caused investors to sell up 10-year US Treasuries, causing yields to rise up to 4-year peak of 2.86% (hitting our Q1 forecast, likely moving towards our 3.15% Q1 high forecast) having jumped almost 7bps on Friday. The 2-year yield was near a 9-year top at 2.162%, tightening financial conditions and offering a more competitive return compared to equities. The dividend return of the DJIA for instance, was 2.13%.
Is this move supported by a global overall rise in inflation?
Well, for Japan and Europe, inflation is actually declining since November, mainly due to their respective rising currencies.
Whilst for the US, the rapid decline of the US$, combined with a rising trade deficit (rise in important goods & services costs) is actually causing a rise of temporary inflation.
Overall, given the current state of the global economies and GDP forecasts, we think that the recent inflationary concerns are ahead of reality.
True, the decline of the US$ (as we were forecasting since 2016, and as we are expecting for another -6% to -8% from the current DXY at 89.80 towards likely 82 for 2018) is adding towards commodities’ price appreciation, however in the general context of inflationary pressures, not that much at this point to be of concern.
Same for labor wage pressures, where particularly in the US, we see concerns for wage costs are ahead of reality.
Additionally, with a global capacity utilization around 75%, we see the past 5 weeks of rising investors concerns with regard to inflation as overdone.
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CGI LLC was founded in 2002, and is based in New York, New York, with additional offices in Luxemburg and Croatia.
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