US inflation is low, but highly variable

Inflation Is Going to Rise; Here's How to Protect Youself

Something ugly is set to make a comeback: inflation.

It won't be like that seen in the 1970s when lava lamps and polyester suits only added to the hideous economic malaise. This time it will be subdued in comparison, but still higher than it has been in recent years.

The consumer price index, which is a measure of consumer inflation, has remained less than 2 percent for most of the last four years, according to government figures. But that period of historically low level of price rises is set to end soon. Here's why and what you can do to protect the purchasing power of your assets.

Commodity prices. "Inflation is rising – the easiest way to recognize it is in the price of commodities," says David Ranson, director of research at HCWE & Co. Commodities prices are rising. The price of crude oil hit a recent low of $26 a barrel in February before rebounding the mid-$40s. Similarly, the Thomson Reuters/CoreCommodity CRB Commodity index, which tracks a broad basket of commodity prices, hit a low of 155 in February before rebounding to 183 lately. "When commodities are rising you get strong inflation," Ranson says. "It won't show up very quickly but there is a lot of data, based on history, to verify that it will show up." It might not be apparent, but the price of gasoline goes into a lot of things we consume, such as bread, which needs to be trucked from where it is baked to where it is sold. So higher gasoline prices, which moves up and down with oil prices, will mean higher food costs. Bond prices. The market for fixed-income securities gives us some clues as well. Government bonds have sold off following the general election in anticipation of higher growth in the U.S. under a Trump administration. Yields move inversely with bond prices. The 10-year Treasury note offered an interest rate of 2.12 percent a few days after the election, versus 1.78 before the election. "Potentially, investors see a significant fiscal boost, which could be very, very good," says Sinead Colton, head of investment strategy at Mellon Capital in San Francisco. "The other thing that is playing in is higher growth and how that feeds through to inflation." Inflation is low, but highly variable. Another important factor is that the headline inflation rate will belie bigger moves in individual components of the consumer price index. "Thanks to a cyclical upturn in non-tradable services inflation, year-on-year core CPI services inflation – boosted by shelter and health care inflation – is hovering around an eight-year high," says Lakshman Achuthan, co-founder of the New York-based Economic Cycle Research Institute. In simpler terms, health care insurance premiums are jumping, as are rents, and that's boosting the overall price level. On the other hand, gadgets and consumer technology items are sometimes falling in price. "Yet they (the falls in some prices and rises in others) don't offset one another, any more than having one foot in ice water and the other in scalding water feels comfortable, on average," Achuthan says. That image of the boiling water and the ice gives some idea of the likely financial discomfort coming. You need a place to live, so you can't do much about rising rents. Plus, the law says you need to purchase health insurance or else pay a penalty. It's likely those additional costs will take a bite out of discretionary spending on things such as dining outside the home. It may not be the right time to invest in restaurant stocks.

Economic Cycle Research Institute, November 15th, 2016

Recent geo-political developments may have economic benefits in the sort-term but in the longer term...

Many commentators have hasted in concluding that the recent geo-political developments will have, after all, economic benefits. This may be the case in the short-term but the real negative effects of heightened uncertainty can come later. We should be cautious in drawing hasty, positive conclusions from those market developments because they may not necessarily indicate that the world economy will have an accelerating recovery with higher growth. So far, those developments point to a U.S. rise in economic growth, but in the context of an "America first" policy. Three factors may contribute to mitigate or even reverse its international spillovers.

The first is the possibility of rising protectionism - hard or soft - that can substantially reduce the effect of higher growth into higher U.S. imports. World trade, already quite weak, may continue to collapse, hurting all open economies dependent on exports.

The second are the negative effects that we are already witnessing in emerging market economies (EMEs). In fact, significant capital outflows and exchange rate depreciations already underway can hinder future growth. Protectionist measures directed particularly against large emerging economies may further decelerate world economic growth and create instability in foreign exchange markets.

The third factor concerns Europe. In this first wave, Europe apparently benefited from positive contagion with some increase in equity prices and a steepening of the yield curve, favouring financial institutions. As concerns equities, the low starting point seems favourable for European markets. Share price levels are relatively subdued in Europe with, for instance, a Cyclically Adjusted Price Earnings (CAPE) Shiller index of just 14 against 27 in the U.S. This means that European shares, including those of banks, are undervalued with respect to other parts of the world and could thus attract investors. However, we already observed a slight drop in European share prices last Friday. According to market analysts, this was explained by fears concerning protectionism and EMEs' growth prospects as well as the possible resulting decline in global trade.

Besides these external concerns, Europe's internal problems may deter it from fully reaping the benefits from the expected expansion in the U.S. Indeed, a range of political risks may induce economic shocks. To face heightened world uncertainty, Europe would need to deepen its unity and integration, relying more on its domestic market to underpin higher growth. In turn, this implies that Europe needs more expansionary macroeconomic policies and more reforms in the regulatory and competition policy fields, in order to improve the economy's supply side. Without higher real and nominal economic growth, Europe will have greater difficulty in overcoming its challenges.

Speech by Mr Vítor Constâncio, Vice-President of the European Central Bank, at the 19th Euro Finance Week: Opening conference, Frankfurt am Main, 14 November 2016.

Is Geneva really the world's first sustainable finance center?

Bas du formulaire

 Swiss ProfilInvest photos docs"Geneva is the world’s first sustainable finance center”, said Federal Councillor Doris Leuthard during a recent speech at the Graduate Institute of International and Development Studies, where she defended the Swiss government’s opposition to the popular initiative for a green economy (Geneva is the only canton having voted yes). Sustainable finance, usually defined as the integration of Environment, Social, and Governance (ESG) factors into financial decisions, has indeed been gaining importance in Geneva over the last years. For instance, the law establishing the pension fund of the canton (CPEG) indicates that it shall operate in line with the principles of sustainable development and responsible investment. In its economic strategy 2030, the canton intends to promote the development of Geneva as an international crossroads of sustainable finance. This vision is at the heart of Sustainable Finance Geneva (SFG), an association founded in 2008 by a group of professionals convinced by the opportunity to connect the financial center with the locally-based international and non-governmental organisations, this “research laboratory on global issues”, in the words of Ivan Pictet, former managing partner of the Pictet Group.

Source: Antoine Mach, Covalence SA, Gencom newsletter October 2016

US third quarter GDP recovered promptly


Recession or not ?

 Croissance PIB US depuis janvier 2015

Deceleration of the US GDP since Q1 2015.

Question : are we going into recession in the USA in 2017 ?

According to the last quarterly GDP report published a few days ago, USA recovered promptly with a 3.2 % growth in the 3rd quarter ending in September 2016. It ends a long period of weakness.

November 30th, 2016 / Jean-Pierre Riepe

Mobius Is Bullish on China


Since last week’s shock result, the nation’s benchmark stock index has rallied into a bull market and the yuan -- while falling to a seven-year low against the dollar -- has risen against a basket of peers. The nine basis point increase in China’s 10-year sovereign debt yield is dwarfed by the 33 basis point jump by U.S. Treasury yields.

The resilience is notable given China was in the cross-hairs of Trump electioneering, with the Republican branding the country a currency manipulator and threatening to impose tariffs on its goods. While Pictet Asset Management Co. says the president-elect’s plans risk sparking a trade war between the world’s two largest economies, Mark Mobius is turning more bullish on Chinese equities, arguing Beijing officials may accelerate market opening.

"I’d say we are more positive on China in a sense that Trump will help open the door up more," Mobius, executive chairman of Templeton Emerging Markets Group, said by phone from Dubai. “There’s a fear that Trump will institute protectionist policies but I don’t think that’s the case. Trump will be more business-like and realistic when negotiating with the Chinese."

Article from Bloomberg dated Nov. 15th, 2016.