Weekly: Reviewing global price trends
- We review a wide range of prices, from food to fuel to metals
- In a number of cases, we see signs of prices bottoming
- Many inflation markers are turning already or slated to turn in 2H19
- These pipeline developments make us somewhat cautious about the fixed income market outlook
Disinflation pressures to dissipate soon
Global fixed income markets have all but given up on the inflation outlook, pricing in a prolonged period of disinflation and low interest rates. With US core PCE well below 2%, (well below 1% for Euro Area and Japan), discussions and expectations have yet again shifted to remaining levers of monetary policy that may be needed if inflation were to trend downward further.
But are global price trends that dire? Granted, between technological disruption, diminished pricing power among producers of manufactured goods, and a surge in oil production in the US, many drivers are conspiring to keep global prices low or stable. But there are also signs of buoyancy here and there, and we think that by the time we step into the second half of the year, many inflation markers will turn positive. The death of inflation is exaggerated, in our view.
Take, for instance, the trend in global food prices. The IMF’s global food price index is about 20% below now compared to 5 years ago, thanks to softening of meat, cereal, edible oil, and soy bean prices. But among most of these items, the price levels have largely bottomed. As base effects disappear, we expect many such prices to show positive growth going forward.
Base effect to keep food inflation in negative territory
Source: IMF, DBS.
Global rice and soybean prices have displayed considerable volatility in recent years; up sharply a year ago and now in deflation territory. As concerns about China’s demand is eased and trade war resolution comes under focus, we expect some this volatility to make way for a more constructive supply/demand dynamic.
Rice is flat; soybean benefitting from trade war respite
Source: IMF, DBS
Lack of conviction on inflation, a subdued electronics cycle, and concerns about China’s demand strength exerted downward pressure on metals last year, but as far as base metals are concerned, we think the worst is over. China’s fiscal and monetary stimulus may not lead to an oil-fashioned investment boom, but signs of its efficacy will surely support base metal prices, in our view.
Metals bottoming; but base effect to persist till mid-‘19
Source: IMF, DBS
Despite concerns about the supply outlook for Iran, Libya, and Venezuela, oil inventories look ample, reflecting substantial production capacity in Saudi Arabia and the US. We don’t expect energy prices to spike this year, but at the same time headline inflation numbers around the world will likely see positive contribution from energy.
Energy has bottomed
Source: IMF, DBS
If global trade were to shrug off the doldrums of last year, there will likely be some reflationary tailwind. Looking at China’s PPI and Baltic Dry Freight rates, we see encouraging signs that the worst of deflationary trends may be behind us.
Trade markers are making a comeback
Source: IMF, DBS
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