- Both growth and inflation are headed down in United States.
- Inflation measures likely to have already topped.
- A lot of uncertainity until the election and beyond.
In the United States, the situation is clearly deteriorating. This will have an impact on growth and inflation but most likely also in other regions, mainly the Eurozone and Emerging Markets. There are several factors indicating it.
Firstly, there is uncertainty due to the election coming up soon. There is no agreement so far about the new stimulus round which is likely to come after the election. The impact on the recovery is going to be severe and indeed the Federal Reserve is worried.
Fiscal stimulus is the pivotal factor these days where monetary policy is not effective at all, neither interest rates are. Volatility has been rising in several asset classes signaling a rising fear among investors below you can see a bunch of them.
Given these increasing fear in market participants, it is worth noticing why we do believe growth is likely to slow down.
The eurodollar curve remained flat and it looks like it's leading the ISM YY change, thus a drop in the next month is possible also because the economy is lacking the G (Govt Expenditure) in the GDP equation.
CESI index has skyrocketed but it will soon come back to reality after a four (FOUR) standard deviations move.
What is also an explosive element is the US Dollar. After being pushed down at the 92 level the DXY is likely to retrace part of the movement. But the idea that the dollar was losing value is not entirely true. Yes, the DXY which is essentially a EUR/USD exchange rate proxy was down but a broader perspective will tell us a different story. The dollar against EM FX is still at really high levels.
The dollar is ready to surge again and the race between central banks will start soon and it is going to be a race to the bottom where the Fed is going to print, but others will have to print more to stay alive, especially the euro.
And the following chart from Nordea suggests the same.
The last point with regards to growth that is the bridge to inflation is the oil futures curve. Looking at the data from the 21st of August we can see how the curve shifted lower across the entire tenor.
Something has slowed down, growth for sure and inflation will follow.
This drop in WTI gives us a clue on what to expect in the future especially when oil is one of the main drivers of inflation.
Looking at market measures they have been flat in recent weeks.
Lastly, the jobless claims rate of change is essentially flat in recent weeks another sign of weaknesses in the economic recovery.
Analyst's Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.