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Stock Markets Beware: Slowing Global Inflation May Flag Recession

By:Ilya Spivak

Canadian inflation fell short of expectations, and attention is turning to upcoming U.K. data

  • Canadian inflation fell short of expectations, fueling interest rate cut speculation.

  • U.K. CPI data is next in focus, with a sluggish result bringing BOE stimulus closer.

  • Faster-than-expected disinflation might speak to growing global recession risk.

Canada’s inflation data fell short of economists’ baseline forecasts in June, as expected. Prices declined 0.1% from the previous month, bringing the headline year-on-year rate to a three-month low of 2.7%. The outcome stoked Bank of Canada (BOC) interest rate cut bets. Local bond yields tellingly fell across maturities.

Interest rate futures are pricing in 95 basis points (bps) in cuts this year, implying three more standard-sized 25bps reductions left before the calendar turns to 2025. That’s after the BOC launched its easing cycle with a cut last month. The probability of a cut at next week’s policy meeting now stands at 90%, according to Bloomberg.


U.K. inflation data now in focus

The spotlight now turns to the U.K. for the next major update on global inflation trends. Incoming consumer price index (CPI) data is penciled in to show that headline price growth idled at 2% year-on-year in June, matching the three-year low set in the prior month.

UK CPI Inflation (Y:Y).png
ONS

Analytics from Citigroup reveal that U.K. economic news-flow has recently soured relative to forecasts, which may foreshadow a softer print than market-watchers anticipate. Purchasing managers’ index (PMI) data put input costs growth at the slowest in three years but also noted that output inflation bounced from May’s 37-month low.

Discretionary spending now accounts for most of the stickiness remaining in U.K. consumer prices. May data showed recreation and hospitality are now the largest contributing categories to inflation, supplying 0.55 and 0.81 percentage points of that month’s 2% rise.


Bank of England rate cuts: another sign of global slowdown?

This ought to make price growth susceptible to slowing economic conditions. On that front, the latest PMI survey offered a sobering story. The pace of expansion across the manufacturing and services sectors slowed to the weakest in three months in June. That is expected to give the Bank of England (BOE) clearance to begin its own rate cut cycle.

UK 1M SONIA Futures-Implied Rates.png
ICE

As it stands, futures markets are pricing in 47bps in easing from the U.K. central bank this year. The first reduction is anticipated to appear no later than November, though the probability of a cut as soon as next month is implied at a better-than-even 64%. A second cut is almost fully priced in for December, with a probability of 88%.

If the CPI report follows the recent stream of soggy U.K. data outcomes, traders may shift the baseline view to expect a sooner move to stimulate. The British pound is likely to weaken against such a backdrop. More broadly, another soft inflation number from a major economy might amplify worries about ominous global growth trends.

Economic outcomes have weakened across developed and emerging markets for the better part of three months, according to Citigroup. S&P Global reports that global growth began to slow in June after seven months of improvement. More of the same may begin to stress resilience in stock markets.


Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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