Probing the “Last Mile”
- 15 January 2024 (7 min read)
Key points
- Geopolitical risks re-emerge to potentially derail the dampening of global inflationary forces
- The US December inflation print was not all good news
- We count on margin behaviour to support further disinflation in the Euro area despite strong unit labour costs
The “macroeconomic fate” of 2024 will depend on whether the disinflation process which started last year can continue swiftly, allowing central banks to remove some of their restriction. Disinflation in 2023 was primarily driven by exogenous factors – the normalisation of supply lines and energy prices - and unfortunately, we are seeing the return of “polycrisis” risks which could derail the general slowdown in the price of tradables in the global economy. The recent developments in the Red Sea suggest that the inflationary impact of the Middle Eastern crisis could take a different form than the “usual’ oil price shock, as supply lines are starting to be disrupted again. The election in Taiwan of a DPP President for the third time in a row forces us to confront again the possibility of another escalation of the Sino-American rivalry, with the potential to trigger another trade war.
Yet, we still see reasons to remain reasonably confident. The Red Sea disruption cannot be compared with the general seizure of supply lines when economies reopened after Covid. The fact that the Taiwanese President-elect did not secure a parliamentary majority, in a configuration in which China is not in the best position to take the risk to lose support from foreign demand, could help avoid tension between Beijing and Washington escalating too far.
Still, even if the exogenous inflationary forces are kept under control, the latest consumer prices print in the US suggests that the “last mile” of disinflation remains bumpy. On a 3-month annualised basis core inflation has been hitting a “resistance line” above 3% since September. The materialisation of the Bernanke-Blanchard sequence, where labour cost-driven inflation takes the lead while supply-driven shocks fade, cannot be ruled out yet. We are less worried about the Euro area, despite the continued decline in productivity there which pushes unit labour costs up, as we expect the deterioration in economic confidence to take margins down.
Disclaimer
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.
Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.
Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ
In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.
Risk Warning
The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested.