War, Deglobalisation and Inflation

War-Flation in 2023

A year on from the Russian invasion of Ukraine, a neat summary of where we are from BofA: “war, protectionism, de-globalization…higher inflation, higher rates.” Case in point re deglobalisation and protectionism – Tesla prioritising battery cell production in the USA not Germany due to protectionist tax breaks in Biden Inflation Reduction Act.

It’s a simple thesis here: War = inflationary de-globalisation theme = higher rates. Theme “winners” in the last year are energy +29% (XLE), manufacturing re-shoring +21% (AIRR), defence/aerospace +14% (PPA), natural resources +14% (IGE), whilst the losers are Bitcoin -39%, innovation -34% (ARKK), bonds -23% (TLT). Of course it’s way too easy to blame war – the inflationary genie was out of the bottle well before Russia moved its tanks in to Ukraine. Central banks were too loose for too long financing huge Covid deficits. Money growth was totally ignored by central banks who insisted it was transitory. Deglobalisation has been a force for longer still, with Brexit and Trump’s trade wars, but the war has certainly catalysed existing trends and made them far sharper.

Stocks and Indices

Stocks rose early Friday as markets continued to chop around support levels. Wall Street rose as yields pulled back a bit; the S&P 500 held on to the 4,000 level that is so psychologically important, whilst the Nasdaq bounced around the old 11,600 support area. The FTSE 100 added around a third of a percent in early trading but was still heading for a weekly loss. US stocks are also set to finish the week lower by 1-2%. Stocks firmed slightly in Frankfurt despite evidence that Germany’s economy slowed more markedly in the final quarter of last year. The eurozone's largest economy shrank by 0.4% quarter-on-quarter, worse than the –0.2% previously registered. The UK GfK Consumer Confidence index rebounded to highest level since April last year but is still well below zero. GfK says “consumers have suddenly shown more optimism about the state of their personal finances and the general economic situation”. Too early to say the worst is over? Of course, but perhaps we can afford to be a little less pessimistic.

Inflation Data Later

Big inflation print due later - the personal consumption expenditures excluding food and energy increased 4.4% in December from a year before, down from the 4.7% reading in November. We’re anticipating another +4.4% yoy and +0.5% month-on-month. The core PCE index is the Fed’s preferred measure of inflation and will be watched closely for further signs of disinflation. Market watchers will pay particularly close attention to services inflation, which is regarded as stickier than goods inflation. A month ago the data showed goods inflation rose 4.6% in December, down from 6.1% in November, while services inflation was steady at 5.2. New home sales and UoM consumer sentiment and inflation expectations are also due up later.

Central Banks and Forex

USDJPY trades flattish around 134 after the Bank of Japan governor to be Ueda said Kuroda-era loose monetary policies were "unavoidable" but "If the outlook for underlying prices continues to improve, I believe that we will have no choice but to review the yield curve control, or at least to review it in the direction of normalization...” Strong hint that normalisation is also ‘unavoidable’. He added: “When we are a little closer to 2%, and when we can foresee the realisation of 2%, we will be able to take steps toward the normalisation of monetary policy.... If it is difficult to reach 2%, then we will take preliminary steps -- that is, we will take steps to continue some form of monetary easing while mitigating side effects". Meanwhile Japan’s core CPI rose to a fresh 41 year high at 4.2%. BofA notes the biggest wage hikes at Toyota and Honda in decades “as BoJ emergency buying bonds to maintain failed YCC regime…humiliating end to QE-era". BoJ to normalise this year…could get interesting.

AI Wars Could Start to Heat

Oppenheimer, on Microsoft and ChatGPT, says: "There are decades with nothing happening, and weeks when decades transpire, clearly currently in the latter”. This after MSFT announced mobile versions of its A.I.-powered Bing and Edge browser apps. Oppenheimer again: “MSFT estimates that 64% of searches occur on mobile phones,' so today's announcement logical and unsurprising in methodical march to expand existing $18bn advertising business ... $MSFT won Netflix ad-tier exclusive from standing start, so not to be underestimated.”