SocGen: Global Deflationary Fears Just Hit an All-Time High
Deflation fears are at an "extreme level," according to Société Générale's head of global asset allocation, Alain Bokobza.
The French bank's proprietary inflation newsflow indicator tracks media reports on price pressures in 15 countries (a mix of developed and emerging markets more heavily weighted toward the former) to get a handle on what the average reader of news thinks about inflation.
Public perception of how inflation is expected to evolve is important to monetary policymakers, because such expectations tend to be self-reinforcing.
"The median of three-year expectations from the New York Fed’s Survey of Consumer Expectations has declined over the past year to its lowest reading in the survey’s short history, and the longer-running University of Michigan measure is at the bottom of its historical range," said New York Fed President William Dudley in a Feb. 29 speech. "Further declines in either measure would be worrisome."
Dudley's concerns are only reinforced by SocGen's deflation newsflow indicator, which recently rose to its highest level on record:
Bokobza explained that fear of deflation is now more widespread than it was when this metric last spiked in the summer of 2015.
"One key difference relative to last summer’s risk-off environment is that the recent deflation fear is a story in both emerging and developed countries," the strategist wrote. "After the turn of the year, a drop in oil prices below the $30 per barrel threshold, uncertainty around the level of monetary policy reaction by the [People's Bank of China], concerns around the health of banks, and a rate cut into negative territory by the [Bank of Japan] triggered a global risk–off wave and renewed fears of a U.S. recession."
Still, Bokobza acknowledges that people worried about deflation might be fighting the last war.
"The renewed fears seem to contrast somewhat with U.S. fundamentals and the recent inflation prints in the U.S.," he writes.
"Somewhat" may be putting it mildly, given recent data. The U.S. economic surprise index has defied its recent seasonal pattern by surging throughout February. More importantly, the core PCE index, the Federal Reserve's preferred gauge of price pressures, rose by more than expected to an annual rate of 1.7 percent in January.
Other measures of inflation from the commonly used to the more esoteric suggest that price pressures are firming in the world's largest economy:
Meanwhile, worries about the world's second-largest economy exporting deflation around the globe also appear to be ebbing. The implied one-month volatility in the Chinese yuan relative to the U.S. dollar derived from at-the-money option prices has dropped to near its lowest level of the year. Another depreciation of the yuan would presumably constitute a deflationary impulse by sparking a round of competitive devaluations and weighing on commodity prices.
Still, SocGen suggests the notion that more central bank easing might be impotent, or worse yet, counterproductive, is behind the increase in concern about deflation.
"The lack of confidence on the efficacy of reflation policies and successive waves of quantitative easing might be weighing significantly on sentiment," concludes Bokobza.