With traders, analysts and pundits growing increasingly worried that an inflationary burst is just around the corner and threatens to spoil the Goldilock narrative, here is a contrarian piece from the equity strategy team of BofA’s Ritesh Samadhiya, who says that contrary to expectations for a few behind the curve on rising inflation, the real threat remains deflation, and a “global policy error”, and as a result it is getting more, not less, vigilant despite its “long-term bullishness”
Why we are getting more vigilant, despite our long-term bullishness
The consensus has embraced the “synchronized global growth/higher inflation/higher bond yields” narrative.
Analysts are scrambling to find even more reasons to project even more tightening – inflation! Wages! Term premium! Less bond demand from the Fed! More bond supply from the US government!
We, on the other hand, are a lot more worried that global growth might be peaking (although robust), that wage inflation is unlikely to be a threat, and that a highly indebted world is too fragile to be challenged by central bank balance sheet contraction in 2019.
We are getting more concerned about a global policy error, of too much expected monetary tightening in the US, even as Chinese monetary policy is already turning south, see the China credit impulse 12-month change on Bloomberg.
For those who believe that tight labor markets lead to higher wages, take a look at Japan. A 25-year low in the unemployment rate (only 2.8%). Real wage growth? – 0.5% YoY in December. Even part-time workers’ wage growth has fallen from 3% YoY in mid-2017 to 2.1% in December.
It is unlikely to be Asian/EM fundamentals that will help us avoid drawdowns – it is likely to be US/Global market internals (stocks/sectors/markets at new lows, advance-decline ratios, percentage of stocks/sectors above various moving averages etc.) that will break down beneath a possibly calm surface, worrying about a possible policy error.
We are watching vigilantly.