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State Street: Watch out for March inflation figures

Emma Wall  |  25 Jan 2018Text size  Decrease  Increase  |  
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March's US inflation figures could upset stock markets, says State Street economist Michael Metcalfe, with prices on the rise.

Stock markets were buoyed by a potent combination of global economic growth and low inflation last year--known as the Goldilocks economy. This not too hot, not too cold, environment has meant stocks and bonds across the globe rose in value last year, almost without exception.

But as we begin a new year, the question is: How long will it last? The two threats to the Goldilocks economy are if either of the dual factors--growth or inflation--disappoints. This is because if either one of these metrics shock central bank policy makers, it would force them to make a decision about interest rates. This in turn would create volatility in stock markets, as institutional and individual investors alike flee less attractive assets for those that offer a better return.

"It is unlikely to be economic growth that disappoints this year," says Michael Metcalfe, head of Global Macro Strategy at State Street Global Markets. "Most indicators suggest growth will continue. If anything, we think economic growth could be stronger this year--it could accelerate from this level."

Metcalfe says that the growth story is so strong because it is not led by just one country--there is promising economic growth in the US, Europe, Japan and emerging markets--lending stability.

"In 2017 there were many events that would have resulted in stock market turbulence in any other year," he said. "But markets are uncorrelated, each has the resilience of their own growth drivers."

Inflation is key risk

And so that leaves inflation. Economists are divided about the inflation outlook. Markus Schomer, chief economist for asset manager PineBridge Investments, says that inflation will be benign this year, with the exception of the UK, where the post-Brexit vote fall in sterling is still taking its toll.

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But Metcalfe is not so optimistic. He believes that inflation is on the rise in the US, and will force the hand of the Federal Reserve's Open Market Committee to raise interest rates.

"We've had many years since a recession. We are reaching capacity in the labour market, so inflation is a risk. Of course, we said this last year, but core inflation in the US fell. But if you take a better look at the data you can see that was down to just a couple of elements. Mobile phones dropping in price made up nearly 50 per cent of the downward pressure on inflation over the summer," he explained.

It was this drop in inflation over the summer that caused the Fed to pause its rate hiking cycle, but Metcalfe expects this to be a one-off event--inflation is on the rise.

"If you strip out energy prices, inflation in the US is already above 2 per cent. March's data will be a key figure to watch. Growth is robust. If Goldilocks is to break, it will be inflation that does it," he predicts.

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Emma Wall is the senior editor for Morningstar.co.uk.

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© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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