Saxo Bank: Inflation is Definitely Knocking at Our Door

The Chinese producer price index may be a trivial economic indicator, but it has ‘fed’ global inflation through export prices, and China has been a powerful support for consumers around the world as the goods and products they imported into their home countries were extremely cheap. The latest statistical release indicating that the index is rising, after four and a half years of consecutive decline, shows that the trend is turning towards higher inflation, so the Chinese yuan must also devalue and revive inflation expectations. At the same time, central banks are preparing to start reducing what has so far seemed like endless QE programs with bond purchases. All of this together means higher prices, lower growth, and a stronger dollar, which is almost a perfect combination for recession, says Steen Jakobsen, chief analyst at Denmark’s Saxo Bank, concluding that inflation is definitely knocking at our door.

– Recession is the economic equivalent of ‘clearing out excesses.’ I believe the world needs to adjust to the existing state of reality that surrounds us, and recession can bring that about. Of course, this will simultaneously mean serious political upheavals, further problems with the social contract and the relationship between the ruling and the electorate, and increased volatility in financial markets, says S. Jakobsen, emphasizing that it is particularly important to understand that all lower prices of products from China have enabled the sustainability of the situation we currently have, in which decision-makers have persistently repeated moves that suited them, as the prices of imported goods in countries such as the USA, the UK, South Africa, and similar net deficit countries have stabilized or even improved the purchasing power of citizens in an environment of low growth and weak earnings.

In the current quarter and the upcoming first quarter of 2017, conditions in the money market will become increasingly difficult, combined with the Fed’s decision to raise interest rates in December of this year. This will also mark the peak of the dollar’s value and a slight recovery in growth in the last quarter of this year. The second and third quarters of next year will bring a recession in the USA, which aligns with the timing of elections and the consequences that come with it, in countries such as the USA, Italy, Germany, France, and Germany, where, logically, there will be complete uncertainty about the events and policies that follow before the elections, says the chief analyst from the headquarters in Copenhagen.

– It is interesting to see how only a small number of analysts and investors in the market are willing to acknowledge that the Bank of Japan changed its policy direction a few weeks ago from one of ever-lower rates to a phase of preparing for so-called helicopter money. This could be the most significant shift in a country’s decisions since the global financial crisis began. The newly announced target rate of zero percent for ten-year Japanese government bonds, after being negative, allows the Japanese government to introduce a higher fiscal deficit through the back door and then full access to ‘helicopter money,’ says Jakobsen, adding that Japan has maintained its role as a leader in experimental economic and monetary policy, which is clearly seen in how the Fed, the Bank of England, and the European Central Bank follow them with whatever year lag.

This new direction with targeted rates for yields on government bonds will certainly also be Europe’s and the USA’s response when we enter a new banking and economic crisis in 2017, as their traditional monetary response to the economic state of the countries we are currently in no longer works, concludes the chief investment officer at the Danish investment bank.