GLOBAL G/I/P UPDATE: THREE QUICK HITS FOR THE ROAD

CONCLUSION: Global GROWTH/INFLATION/POLICY dynamics are poised to incrementally deteriorate in 2H12, leaving bailout hopes or central planning speculation as the only factors in support of a bullish bias on “risky assets” from here. As we learned in late 2007/throughout 2008, those catalysts have the potential to leave a great deal of investors caught offsides.

 

GROWTH

With the inclusion of this morning’s ISM data, we’ve collected a broad swath of global PMI data for the month of JUL throughout this past week. Unfortunately for growth bulls, the data implies that the global growth outlook continues to deteriorate. In the chart below, we scatter plot the nominal PMI readings of various countries and economic blocs vs. the corresponding sequential delta. As the chart shows, global PMI readings generally slowed or showed outright contraction (or both) in the month of JUL. Moreover, weakness in the New Orders subcomponent in a handful of key surveys – including the US and China – lends credence to our view that global economic growth is poised to continue slowing over the intermediate term.

 

GLOBAL G/I/P UPDATE: THREE QUICK HITS FOR THE ROAD - 1

 

INFLATION

On the inflation front, we continue to view any incremental monetary easing out of the Federal Reserve (and incremental front-running of said easing in the commodities markets) as the key upside risk to global inflation figures over the intermediate term. One key point we highlight in the chart below is the fact that the global trend of reported disinflation is poised to come to a screeching halt in the JUL/AUG periods, largely due the waning trend of YoY commodity deflation, which peaked in JUN (generously holding current prices flat through year-end).

 

GLOBAL G/I/P UPDATE: THREE QUICK HITS FOR THE ROAD - 2

 

Looking ahead 3-6 months, incrementally less YoY deflation in the commodities markets will become a tailwind, on the margin, for rising CPI figures. While we do not necessarily see material upside to global inflation readings in 2H12, we are keen to flag this important change on the margin, which has dire policy implications as indicated in the next paragraph.

 

POLICY

With global economic growth continuing to slow and reported inflation statistics poised to bottom and accelerate in 2H across many economies, the global economy is at risk of experiencing marginal stagflation (i.e. “Quad 3” in our proprietary G/I/P analysis) – an event that may serve to handcuff many central bankers globally.

 

Recall that heading into 2012, one of the predominant factors in the consensus bull thesis was a global trend of monetary easing – particularly in across the developing world. Arresting that trend or potentially pricing in tighter monetary policy on the margin will likely become a headwind to asset classes that rely on easy money and the associated speculation therein to appreciate. Look no further than the PBOC’s recent quarterly monetary policy report that suggested that “consumer inflation may rebound after August” for emerging confirmation of our view.

 

Additionally, we continue to anticipate that growing fear of the Fiscal Cliff and another Debt Ceiling showdown in the US has the potential to increasingly weigh on global financial markets as we get nearer to those catalysts. Refer to our 3Q12 Macro Theme titled, “The Cliff" for more details.

 

In the chart below, we run the Bloomberg-coagulated World Real GDP and CPI figures through our G/I/P screen and the outlook leaves much to be desired for bulls.

 

GLOBAL G/I/P UPDATE: THREE QUICK HITS FOR THE ROAD - 3

 

All told, global GROWTH/INFLATION/POLICY dynamics are poised to incrementally deteriorate in 2H12, leaving bailout hopes or central planning speculation as the only factors in support of a bullish bias on “risky assets” from here. As we learned in late 2007/throughout 2008, those catalysts have the potential to leave a great deal of investors caught offsides.

 

Darius Dale

Senior Analyst


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