Stay cautious about these reflation trades

12 December, 2016

We have recently described you a potential reflation trend. The data on price and wage pressures recently released in China and Germany fit the theme of global reflation - consumer and producer prices finally heading north which with time translates to wage pressures.

This is actually the positive scenario of getting out of the low growth - low CPI - low rates trap in which most of the world economies were stuck for years. On the other hand growing inflation may affect the attitude of PBOC and any tightening could spark, in connection with strong capital outflows and weakening CNY,  a wave of fears about economic stance of this economy. We should receive data about new loans and credits between 12.12 and 15.12. 

However Citi recommends to stay cautious before piling reflation trades just yet. Bank;s most recent investor survey shows  expectations for inflation to stay low. Key points of the survey:

  • Respondents see subdued growth and ``very modest’’ inflationary pressures
  • Emerging markets are seen doing better next year relative to advanced economies, with China avoiding a hard landing
  • Monetary policy is seen as less accommodative, given it’s increasingly ineffective, while more fiscal support is expected
  • Politics will play a significant role in shaping global growth, and geopolitical events and increasingly nationalist policies are seen as major risks

Citigroup’s survey suggests modest inflationary pressures. What is bizzare - bond markets suggest otherwise. Yield curve are steepening all across the globe. Long-terms yields are rising with unprecedented dynamics in the US, Japan but also in Europe where inflation is stuck well below the ECB’s target.

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