Posted by on April 16, 2017 1:31 pm
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Categories: Bond Business China Danske Bank Economy Economy of China Euro Eurozone fixed Inflation Price of oil Reflation Twitter Wall Street Journal

After seeing and analyzing a fresh batch of macro-economic data, Danske Bank now thinks there are an increasing amount of signs the global business cycle is peaking as the US car sales and US personal spending fell short of expectations. The so-called ‘Trump factor’ (or ‘Trumpflation’) is losing steam, and perhaps even more important, the rate hikes we recently saw in the USA already have a huge impact on the American economy.

Whereas we saw the ‘reflation theme’ gaining ground last fall when the US inflation numbers were closing in on the official target of 2%, the inflation will very likely start to come off in 2017 as the commodity-related inflation will decrease as well. After all, 2016 was the year wherein the oil price increased by in excess of 50%, and the higher energy prices were one of the main contributors to the total inflation number.

Oil price


As the oil price is now still trading in a range of $46-55 per barrel (and will very likely stay there), the inflational pressure caused by the commodity sector will most definitely be much lower than last year. As you can see on the next image; there’s a really interesting (but logical) correlation between the oil price and the inflation rate and inflation expectations in both the Eurozone and the USA. The oil price has been relatively steady (sure, there are peaks and bottoms, but nothing in the magnitude of last year’s huge oil price surge), and this means the inflation rate will also level off.


Source: Danske Bank

This theory is actually also confirmed in the bond markets. The past few days, several news outlets have been reporting on a huge inflow in the bond markets. After a total of approximately $40B was pulled out of bonds, investors are re-gaining interest in debt securities. According to the Wall Street Journal, whose reporting has always been credible, in excess of $100B has been pumped back into fixed income funds, whilst $180B found its way to junk bond issuers – and this is perhaps one of the most worrisome updates we have heard in a while. This means investors are losing their confidence in a continuously buoyant stock market, and a stunning $2.5B was invested in high-yield funds and ETF’s in the first week of April. And that’s the highest cash inflow in more than three months.

HY inflow


We already discussed the (obvious) correlation between the oil price and the inflation rate, and it’s important to note that any slowdown of the Chinese economy will have an immediate impact on the oil price as well. And it definitely does look like China might be in for a pause. The iron ore price has been plummeting lately and considering China is the largest importer of iron ore, the lower price for the raw material can directly be attributed to a lower demand from Chinese steel mills. Either because the demand for steel is lower, or because they still have access to outsized inventory levels on the Chinese mainland.

Inflation 2


Long story short, be prepared for a slowdown in the economic growth, both in the USA and in the Eurozone. The signals coming from China aren’t very encouraging, and the recent weakness in the iron ore price is a sign the economic output of the Asian country isn’t as strong as you’d expect it to be.

These are unprecedented times and uncharted territory, and President Trump’s rhetoric to make the US Dollar weaker makes everything even more interesting.

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