Measure twice, cut once

Henry Adams

Chief Product Officer
Tuesday, Jan, 16, 2024

Inflation remains the name of the game. This month we’ll understand where countries are, specifically related to their ability thus far to curtail prices that have been spiraling out of control. If the investor community is right, there’s a chance of avoiding recession. If not, then, well, it may not be quite so rosy. Outside of this, you’ll read about the usual topics of risk, credit, and of course coverage of the major currencies our clients are most active in. So what? We’ll get to that too…


Yep, inflation is lower almost everywhere. This is great. The concern remains though; how far are we from somewhere respectable that doesn’t make us revisit almost the daily question of “how much?!”. To do this, I’m popping the lid on the latest numbers from none other than the International Monetary Fund (or IMF). Respect their work or not, they got a lot of data. Attention is focused on the CPI (or Consumer Price Index), which arguably has the biggest impact on all of us of the measures of inflation. Not just in terms of discretionary (or lack of) spend. This figure is a major contributor to the setting of benchmark interest rates.

In emerging markets and developing economies (again don’t shoot the author for political correctness, rather stick with the need for a scale against which to understand on a relative basis) acreage of GDP across these markets sits at a healthy 4%, viewed differently, not far off the long-term average. Who wants to be average? Well, right now, probably most, given this average dropped to -1.8% in 2020, the worst for decades, or ever. CPI also looks to be coming in line with the average of the last 20 years and WAY off the lofty peak of the early 90’s where this figure goes through 100%. What do you mean its costs double?! Ouch. Often a major contributor to the price of goods for these nations is the trusty USD, the value of which has also been contained. For continued success, watch the value of this. For now though, it feels like there is nothing to see here.

In advanced economies, annual CPI is  still at an elevated 4.6%, an average target of 2%. Previous to this latest bout, a level also not seen since 1990. GDP is also not looking great. Sorry. 1.5% the figure, and very conservatively speaking, 80% below the long-run average. Does not sound quite so advanced, unless referring to the advancing of prices and slowdown. What does this mean? Well, as a percentage of global GDP, a group of countries is in decline. Here’s a picture:

Source: The International Monetary Fund

To add to the fun and throw some additional likely upsets along the way, political risk remains elevated and not just for the obvious reasons of escalation of conflict in the places we have been seeing and hearing about. Elections are looming with more than 70 countries going to the polls this year. In numbers, around 4.2bn people. Stepping out for those jurisdictions that have decided democracy is not for everybody and you have quite the number of potential shifts in government and policies and hopefully some progress.


Stocks have not kicked off quite as they finished up, with almost all major indices struggling to find the buy button. It’s green! Unlike the index. The NYE hangover seems to be taking ever longer to shift, and not just for the author. Continued volatility in the future path of central bank rates and longer-term averages are not helping here, as the higher for longer mantra is mostly being upheld. Cracks though are forming, leading to breakouts of exuberance in risk. The VIX, a common measure of fear in the system, remains relatively muted, as one might expect, well off the fear-inducing 30, sitting somewhere in the early teenage years since the ball dropped.

Source: Bloomberg


Exuberance in credit has been considerably more consistent. We have seen a deluge of supply come through with issuers keen to lock in liquidity despite the projected 150-175 basis points of cuts to be delivered across advanced economies, according to the research departments of the leading investment banks. A record Thursday last week saw in excess of EUR 40bn issued in Europe alone. One might think a good strategy would be to borrow later when rates are surely going to be lower later? Maybe some lessons of covid really were learnt. Run larger cash buffers and take liquidity when it is there, before any inevitable squeeze. The premium paid for non-governmental institutions has also remained compressed. With earnings season just around the corner, we’ll see whether that was right or not in due course.


Back to the IMF for a moment. Real GDP sits at 1.4% whilst CPI remains more than double target at 4.1%. This though, not the full story. There is additional complexity around setting a policy suitable for Spain, enjoying prices rising a modest 2.5% versus the Benelux region where it averages out above 4%. Generally the view is that rates will come down this year, but what one should really be asking is, what if not? Well those growth figures might continue to remain muted but at least inflation should average out, lower. The danger of easing too soon is that we end up with a repeat of lost quarters arguing over wages and needing to ramp up the base rate again causing pain on the way up, as always.


With a general election coming, precise timing unknown, the outcome does at least look less extreme than many others with centrist politics holding. The spring budget will be telling as to how conservative this government can be, by the degree to which taxes might be cut, if there is room…

One area of the shopping aisle and restaurant menus far and wide that continues to confuse the author can be found in the adult section. There is something wrong with pricing when the cost of English sparkling wine exceeds that of the clearly superior French fizz. As per the below, if I want something that tastes like brioche, I’ll probably buy that, and a lobster instead, with change left to purchase accompanying liquidity. Sorry, but it also tastes terrible, much like inflation remaining well above where it should be at 3.9%.

The mortgage market though appears to be in full swing, with 5-year rates back below 4% and housing seemingly finding a floor with affordability back on the right path. Now whether 5.25% is too high is hard to say. One thing is for certain; the market pricing in almost a full cut by May is exuberance once again, this time at its finest!


Debt ceiling tensions inbound, again. Even though we were promised last time we’d not need to revisit for some time. Important to be cautious in investing in anything government (or government-backed) as shutdowns also mean you don’t get paid when you expect to. Suboptimal for managing what is supposed to be liquidity. A reminder of the dangers of complacency: US inflation data for the last quarter of ’23 caused a stir last week, accelerating once again to 3.4%. Chat of a March cut seems ludicrous too. What the data also showed is a trend witnessed elsewhere and a symptom of the post-pandemic WFH where consumption in services over goods has been driving price rises. Not great for manufacturing either.

Interestingly, the Fed’s Emergency Loan Program won’t be extended beyond the March 11 date originally mapped out to ensure the regional banking crisis didn’t turn into a national one. Let’s hope they are right about that one. At least it is ready and waiting in the wings when needed.

So what?

So inflation isn’t where it needs to be. Well, markets are currently painting an almost perfect outcome with easing staving off a recession because everything is working out just great. Watch out for stubborn and now engrained changes in the cost of everything, making it that much harder to move monetary policy to friendlier and more accommodating rates. Market levels are likely to bounce before they cut, opportunities are coming to lock in for longer and in the meantime don’t believe the hype. Premiums are also likely to follow suit. The risk of stagflation remains, and, in my view, is rising again not just with geopolitical instability and disruption to supply chains, but political uncertainty with what must be a record number of people going to (or not bothering, which is worse) the polls. Vote!



To have or not to have?

To have or not to have?

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Back to the races

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