Thursday’s ADP employment growth figure modestly stood out with a meagre addition of 89,000, but the real stunner last week was the ISM Manufacturing Prices Paid Index. Contrary to expectations and amidst surging energy prices, it plummeted last month to a level of 43.8, nearly five points lower than the previous month.
The above chart illustrates the ISM Manufacturing Prices Paid Index juxtaposed with the US headline inflation. Given the undeniable strong correlation between these two macro variables, inflation should, theoretically, decrease to around or even below zero within the next six months. Especially when you consider that the Prices Paid levels in the preceding months have also hovered around ‘deflation-like’ figures.
While investors, central bankers, and economists primarily focus on the persistence of inflation – which for at least the next two months will be driven by base effects and elevated energy costs – the underlying picture might be a tad more nuanced.
For context, who could have predicted in June – less than four months back – when a 6 percent inflation rate for May was reported, that come September, the Netherlands would be announcing deflation? In fact, as per the EU harmonised methodology, Dutch prices saw a decline of 0.3 percent year-on-year.
Certain specifics come into play at our end, such as the Dutch energy policy, which led to an energy inflation peak within the CPI basket at over 100 percent. In contrast, for the Eurozone, it stood at “only” 40 percent.
Turning back to the US, the ISM Services Prices Index held firm at 58.9. However, even this might not prevent a dip in headline inflation towards 2 percent, as illustrated in the subsequent chart.
My argument is that for the first time in a long while, inflation risks appear reasonably balanced. Downward outliers, like the one witnessed in the Netherlands, shouldn’t be entirely dismissed. This holds especially true if one anticipates a significant weakening of the US job market, which seems to be on the horizon. Just as bond investors are scurrying, trying to rapidly offload those seemingly cursed investments.
Jeroen Blokland is the founder of True Insights, a platform that offers independent research to assemble diversified multi-asset portfolios. Most recently, Blokland served as the head of multi-assets at Robeco. His ‘Chart of the Week’ is featured every Monday on Investment Officer Luxembourg.