Global Outlook: The Inflation Battle Drags On


Interactive Brokers’ Senior Economist

Disappointing inflation data and recent comments from leaders across the globe point to persistent economic challenges, including the need to curtail rapid price increases with additional monetary tightening. At the same time, Russia’s invasion of Ukraine is grinding onward, weighing on the global commodity complex, Chinese lockdowns continue to hurt global supply chains and cryptocurrency is tanking is response to liquidity fears. Turbulence is also occurring in the U.S., where equities are falling due to uncertainty regarding which political party will control Congress. Also in the U.S., tech layoffs are gaining attention, but I believe it’s unlikely that the layoffs will extend to other sectors.

Many of these developments imply that engineering a global soft landing, rather than a recession, has become increasingly unlikely as high inflation continues to require additional monetary tightening.

ECB Kills Hopes of Quick Pivot

In comments echoing last week’s statements from U.S. Central Bank Chairman Jerome Powell, various members of the European Central Bank (ECB) dashed hopes of a pivot from the organizations hawkish inflation stance. ECB Vice-President Luis de Guindos said tackling inflation requires further rate increases before demand is curtailed. He warned that the rate hikes are also likely to curtail investments, but he said the macroeconomic pain of not raising rates would be worse than the results of the central banks’ hawkish policies. Recent data shows that eurozone inflation hit 10.7% in October and in Germany, 11.6%, a 70-year high as both surprised to the upside. Like the U.S. central bank, the ECB strives to maintain inflation at 2%. The ECB has already raised its deposit interest rate from -0.5% to 1.5% and investors anticipate that the organization will hike rates another 50 basis points (bps) next month.

England’s Central Bank: “We are not inflation nutters

After hiking its short-term interest rate 75 bps last week, the Bank of England (BoE) responded to criticism that its hawkish policy could spark a recession. The bank’s chief economist, Huw Pill, reached beyond technical economic terms to claim, “we are not inflation nutters,” borrowing an expression from a former BoE governor that refers to central bankers who concentrate on inflation to the detriment of growth. Pill explained that rate hikes are needed to keep inflation from becoming entrenched in the economy. The BoE’s bank rate is now 3%, reflecting eight rate hikes and the country’s September inflation rate was 10% on a year-over-year (y/y) basis, surprising to the upside.

Food Security Concerns Resurface as Ukraine-Russia Conflict Continues

Fears about a global food crisis resulting from the Russia invasion of Ukraine have resurfaced. A United Nations brokered agreement between the warring countries that allows Ukraine, considered by some to be the breadbasket of the world, to ship grains and other foods through the Black Sea expires on Nov. 19. Since striking the agreement more than 10 million tons of grain have left Ukrainian ports. The loss of future exports, while creating food insecurity, would also cause food inflation if Russia and Ukraine fail to reach a new agreement.

No Signs of Relief for China Lockdowns

Investors that were disappointed by central banks failing to pivot quickly from monetary tightening had another development to fret over—contrary to common expectations, Chinese officials reiterated their commitment to a zero-COVID-19 policy, implying that lockdowns won’t be eased, or at least eased significantly, in the foreseeable future. The comments implied that China’s manufacturing sector will continue to struggle with lockdowns, limiting its ability to improve the troubled global supply chain that is providing inflationary pressure. The country reported 5,496 COVID-19 infections for Sunday, a six-month high.

Crypto Nears the Crypt

Cryptocurrency exchange FTX has announced that it will address its liquidity crunch by being acquired by rival Binance, which sent cryptocurrency into a tailspin and strengthened concerns about the health of digital currency follow recent crypto bankruptcies. FTX’s own token has tanked 75% and Bitcoin, while experiencing a more modest decline since Tuesday afternoon, is trading near its lowest level in two years.

Tightening liquidity conditions have brutally punished the cryptocurrency sector

A Glimmer of Progress But Little Relief in Sight

In an early victory in the war against inflation, monetary tightening appears to be moderating global demand for goods, with China’s exporting y/y growth weakening to only 5.7% in September compared to the 7% y/y increase in August. The weaker growth is attributed to higher interest rates in many countries dampening demand for consumer goods and reducing business capital expenditures. Real estate markets are also weakening in many countries, such as the U.S. and Australia, implying that interest rate increases are starting to curtail demand. Based on headline inflation numbers, however, it’s unlikely that central banks will pivot from aggressive efforts to curtail inflation, which is increasing the likelihood of a painful recession.

Australian Consumers Feel the Pain

Australia’s economy is continuing its tradition of outperforming economies of most other countries, but pain is growing there. The Westpac Bank consumer sentiment index released on Monday tumbled to its lowest level since the early days of the pandemic in April 2020 as individuals have felt the bite of inflation and higher interest rates. Poor sentiment extended beyond consumers with the National Australia Bank Business Confidence Index, which measures attitudes about hiring, sales and profits, also declining. The pessimism extends to real estate, with the number of total building permits in September dropping 5.8% and private sector house permits falling 7.8%. Australia’s inflation rate during the third quarter hit 7.3%, it’s highest rate since 1990 and the country’s central bank, the Reserve Bank of Australia, expects that rate to peak at 8%. The central bank has raised its target cash rate from 10 bps to 2.60%, its highest rate since early 2013.

Trade Issues Arise at COP27

The 2022 United Nations Climate Change Conference, or COP27, kicked off as the World Meteorological Organization reported that the world is on track to have the warmest eight years on record. Certain attendees spoke out against the U.S. Inflation Reduction Act, which includes tax credits for certain clean air items, such as electric vehicles, that are assembled in the U.S. The delegates maintain the provision is trade protectionism at a time when countries must work together to battle climate change. Also during the conference, U.S. envoy John Kerry was expected to propose a carbon-credit program that could increase demand for clean energy products by providing funding for emerging markets to develop alternatives to hydrocarbon fuels.  

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers LLC, its affiliates, or its employees.

Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.