Price action in commodity and fixed Income markets this past week continue to signal the need for higher rates despite central banks desire to ease monetary policy. Global manufacturing PMI’s are rising again, business sentiment is improving, and US labor markets remain robust. Easing financial conditions and forward guidance by central banks on rate policy is providing a powerful boost to underlying economic conditions at a time when short term inflationary pressures are again rising.
While central banks are keen to at least begin the process of normalizing policy, we think for now patience is warranted. Central banks Core inflation rates both in North America and Europe hover near or just above 3% while Headline inflation rates have declined more drastically. The decline in headline rates has been good news but is unlikely to continue. Energy markets have rallied aggressively and will now begin to meaningfully exert upward pressure on main CPI indexes in the coming months. Europe, in particular, could be susceptible. Headline inflation in Europe has experienced a sharp deceleration recently due to favourable base effects in energy. This is unlikely to continue as past base effects wane and recent upward movements in the price of Oil start to show up in the number
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