Does Soft-Landing Suffice for Inflation to Stabilise?

Some claim that the answer is yes, and others stated no. Nevertheless, data gathered throughout history shows that the percentage level of fluctuations in an economic contraction for inflation to be tamed has been declining – and the velocity of money plays a crucial role.

Keys in the article:

• Signs that inflation may stabilise;

• Velocity of money at work;

• FED and ECB actions.

For quite some time now, the US and EU have been giving mixed signals in their economic data release, and markets have been caught off guard numerous times. Leaving them to trade pre soft or hard-landing economic data.

Signs that Inflation may Stabilise

Both the US and EU are now releasing leading indicators data that points towards a slowdown in their respective economies (at least in demand), data such as capacity utilisation, manufactured goods, manufacturing PMI, industrial production, and durable goods – solely to name a few – are either showing signs of weakness or indecision. These are all indicators relied upon to gauge whether economic expansion or contraction is to be expected, and when you gather, and analyse each of them, there is a clear distinction between the end of the previous year and the beginning of this year. These indicators were all growing (signs of expansion) to the end of 2022 and now are all either in a range (giving mixed signals) or declining (signs of contraction) – not forgetting that corporations are now laying-off employees, and some are deliberately reducing the price of their product.

The recent financial stress which resulted in UBS buying Credit Swisse, and the US and EU reviewing the resilience of their respective banking sector, slightly aided in putting a break for consumption which shall then have an effect on both the Velocity of money and Inflation.

The Velocity of Money at Work

Data gathered throughout history shows that the percentage level of fluctuations in an economic contraction for inflation to be tamed has been declining – and the velocity of money (VM) plays a crucial role. VM or the rate at which money is exchanged for goods and services is pro-cyclical, meaning that it grows with an economic expansion and shrinks in an economic contraction. VM has in the past 3 years been decreasing at a fast rate, and since it is pro-cyclical, it means that it is connected to Durable goods and Direct Investment, which are the two components that prices fluctuate the most in the economic cycle. Services and Non-Durable goods have fewer fluctuations and thus less impact.

It is common for consumers to put a pause on Durable goods and Direct investment when they are not confident in the economy, thus the price of those products can be utilised as a sentiment indicator.

Recent data released shows that Service and Composite PMI are still growing, and that payroll in those sectors are also growing, but in contrast, Manufacturing PMI is contracting and payroll in this sector is also contracting.

FED and ECB Actions

Central banks have increased interest rates at a very fast pace and they are expecting to further increase them to then hold them at their targeted rate until further and more convincing data showing that inflation is abating is released – of course, this is solely if they are not forced to take other measures.

By having a look at ECB´s “monetary aggregate and counterparts” data, we are able to witness the exodus of M1 to M3, to be more specific, from cash (money in circulation and bank deposits) to securities with up to 2 years of maturity. M1 has decreased by nearly 3% but M3 has seen an increase of over 4%. Consumer credit and corporation credit have also been declining.

But as mentioned earlier, Services and Composite PMI together with many other indicators are still growing, and just last Friday the 7 th , the US unemployment rate ticked lower to 3.5% (previous was 3.6%), confirming the need for FED´s Chair Jerome Powell and ECB´s Governor Christine Lagarde to continue tightening monetary policy by raising the interest rate.

At Reign Capital, we see the FED and the ECB following through with their statement and hiking rates to their targeted rate, but then reducing them before the year ends as to avoid a hard-landing especially when it is thought that inflation would have been tamed.

We have been long in the US Dollar against the EUR, GBP, and JPY for the past year and now have opened an opposing position (short) due to cracks showing in the US economy, signs of inflation abating, and better sentiment in Japan, Euro Area, and the United Kingdom.

Given the increased risk associated with the current Banking systemic crises, we have increased our positioning in both Gold and Silver.

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Disclaimer

This publication has been prepared by the Investment & Proprietary Trading Department of Reign Capital Limited. (“RC”) solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but RC does not represent that it is accurate or complete. RC does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice. The distribution of this publication may be restricted by law or regulation in different geographical jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions. Copyright and database rights protection exist in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent in writing of RC. Reign Capital Limited is an Institute of Trading and Quant Global Macro Management firm registered in England and Wales under registered number 12937913. Reign Capital Limited authorised and regulated by FCA Hosting Licence in strategic partnership with Pelican Asset Manager / London & Eastern LLP (authorised and regulated by the FCA, FRN: Number 534484), and brokerage alliance with AXI / AxiCorp Limited (authorised and regulated broker in the UK by the FCA). Our registered address is at Office 3.05, 1 King Street, London, EC2V 8AU, United Kingdom. Investors' capital is always at risk.

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