Inflation outlook and the implications for investors
Global Thought Leader Spotlight
Joe Kalish, Chief Global Macro Strategist, Ned Davis Research (NDR)
Analysis as of 26 October 2022
Joe Kalish is the Chief Global Macro Strategist for Ned Davis Research (NDR) Group. He has been following and studying financial and economic trends for over 35 years. Joe and his team are responsible for all of NDR’s bond and economic analysis, which assists the firm’s strategists by identifying relevant economic trends and fundamental themes and provides historical market perspectives, giving context to the unfolding macro environment.
“In my role as the Chief Global Macro Strategist at Ned Davis Research I am responsible for developing and communicating the firm’s global and U.S. fixed income strategies with a particular emphasis on monetary policy. I also identify themes beyond the current cycle that impact valuations in financial and physical markets.
“Currently I am particularly focused on inflation dynamics and supply side shortages, and how that impacts monetary policy at the major central banks, especially the Federal Reserve.
“I am thinking about inflation from multiple perspectives, across different time horizons.
“Shorter-term inflationary pressures appear to be peaking. Supply chain challenges are easing. Supplier delivery and input cost indexes are coming down. Port congestion and backlogs are clearing. A measure of global supply chain pressures shows inflation peaking around here and declining into the first half of 2023. In general, we are seeing inflation subside for goods, especially for durables. Services inflation, however, remains stickier due to tight labour markets. But even here, house prices are starting to fall, and medical care services could be peaking too.
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A measure of global supply chain pressures shows inflation peaking around here and declining into the first half of 2023.
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“I am more concerned about the intermediate-term outlook and whether we can meet the supply side challenges. There is a housing shortage in many economies. Raising rates is crushing demand but also inhibiting supply by raising the cost of capital. When economies recover from the global slowdown, price pressures are likely to return.
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When economies recover from the global slowdown, price pressures are likely to return.
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“Second, we have moved from an age of abundance to an age of scarcity for many commodities. Signs of scarcity are all around us and are particularly apparent in the energy and food sectors. A lack of investment coupled with a climate crisis was evident even before Russia’s invasion of Ukraine.
“Third, labour remains in tight supply and compensation has risen. Restrictive monetary policies should soften these markets. But pricing will recover once the cycle turns.
“Longer-term, disinflationary forces still dominate with a rapid pace of technological innovation, aging demographics, high debt levels, and well-anchored inflation expectations. That is somewhat being offset by the reconfiguration of global supply chains.
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Longer-term, disinflationary forces still dominate with a rapid pace of technological innovation, aging demographics, high debt levels, and well-anchored inflation expectations.
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“Breaking this down into what the implications are for investors, in the short-term we are likely to see improvements on the inflation front which should allow global central banks to end their tightening cycles in the early part of next year (2023). That should lead to a peak in bond yields and a trough in the curve flattening trends. Bond investors should finally be able to earn some income. High quality corporates and agency mortgages look particularly attractive. Inflation linkers should also work well over the intermediate term, particularly in the U.S. Even cash could earn positive real returns.
“The intermediate-term outlook will hinge on whether central banks can return inflation back to targets without doing a lot of economic damage. If they can, that would create a favourable environment for fixed income. But any rally could end once the cycle turns, if the supply side challenges haven’t improved and inflation returns once economies recover. The outcome could be even worse for bond investors if central banks abandon the inflation fight before the job is done.Either way, the risk is that investors will start to lose confidence in central banks, which should result in inflation expectations becoming unanchored, term premiums rising and new highs in bond yields.”
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The intermediate-term outlook will hinge on whether central banks can return inflation back to targets without doing a lot of economic damage. If they can, that would create a favourable environment for fixed income.
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Joe presented his views on the global macroeconomic and inflationary environment at Global Investment Institute’s 2022 Fixed Income & Defensives Investment Forum. If you would like to receive a copy of his presentation, please email zlatan.kapetanovic@globalii.com.au.
Joe Kalish, Chief Global Macro Strategist, Ned Davis Research (NDR)
Joe Kalish is the Chief Global Macro Strategist for Ned Davis Research Group. He has been following and studying financial and economic trends for over 35 years. Joe and his team are responsible for all of the firm’s bond and economic analysis.
The Macro team assists the firm’s equity strategists by identifying relevant economic trends and fundamental themes and providing historical market perspectives. They collaborate with the Global Strategy team and provide economic analysis through global and regional commentary. They also work closely with the U.S. Strategy team in helping to formulate the economic outlook for the major sectors of the economy. In recent years, Joe has been particularly focused on credit trends and credit-sensitive sectors of the economy, including residential and commercial real estate, and has written extensively on these topics. Joe was also a portfolio manager and trader for an equity mutual fund for five years.
Joe is a member of the National Association for Business Economics. He is regularly quoted and interviewed by the financial media in the U.S. and internationally and is a featured speaker at investment conferences.
Joe received his Bachelor of Science degree in Information Systems Management cum laude from the University of Maryland and his Master of Business administration degree in Finance, with distinction, from the Stern School of Business of New York University.
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