THINK Ahead: Inflation’s second wave – is history really repeating itself?
At a Glance
The desk posits that the current inflation landscape suggests we may be on the cusp of experiencing a 'second wave' of inflationary pressures, reminiscent of historical patterns. Per the full note from ING Economics, there is increasing concern that inflation may be more persistent than previously anticipated due to a mix of factors including supply chain disruptions and elevated consumer demand. Notably, core inflation metrics remain elevated above central bank targets, with recent readings illustrating that inflationary dynamics are proving to be sticky. While no high-impact calendar events loom ahead, traders should stay mindful of evolving trends that could impact monetary policy.
Key Takeaways
- 01A second wave of inflationary pressures is anticipated, drawing from historical inflation cycles.
- 02Core inflation trends, particularly in the Eurozone, remain significantly above central bank targets.
- 03Market implications could prompt central banks to reconsider rate strategies.
- 04No high-impact calendar events are expected in the immediate future.
Full Analysis
What the desk is arguing
The desk argues that inflation is likely to reemerge as a significant economic factor, drawing parallels to previous inflationary cycles observed in history. Per the full note from ING, this suggests an impending risk that could influence central bank policies and market movements.
Recent data reveals that various inflation indicators, particularly in developed economies, remain stubbornly above target levels. For instance, core inflation across the Eurozone has hovered around 5%, well above the ECB's goal of approximately 2%, highlighting the potential for further rate hikes if these trends persist.
The alternative read would be that recent tightening measures by central banks could effectively tame inflation, leading to reduced rates sooner than expected; however, historical data indicates that inflation can often take time to subside, complicating immediate assessments.
Where it sits in our coverage
Currently, our consensus target for the EUR/USD stands at 1.075, with a range between 1.04 and 1.12. Noteworthy firm targets include:
Given the analysis from the desk, our outlook aligns closely with JPMorgan's position, suggesting we may be at the higher end of the projected range with implications of further inflation driving rates.
How other firms see it
Firms such as JPMorgan are aligned with the current inflationary concerns, emphasizing potential rate adjustments. In contrast, BofA takes a more cautious stance, suggesting that inflation could stabilize sooner than expected.
For traders, keeping an eye on the Eurozone's CPI readings and the upcoming ECB meetings will be crucial, as these will provide insights into how monetary policy may shift in response to inflation trends and economic data points.
Market Implications
Traders should monitor core inflation data closely, particularly in the Eurozone, as it may catalyze further action from central banks that could impact the EUR/USD rate. Additionally, any upward surprises in inflation prints could solidify market positioning toward a hawkish outlook.
From the original
https://think.ing.com/opinions/think-ahead-inflations-second-wave-is-history-really-repeating-itself/
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4 itemsTHINK Ahead: Inflation’s second wave – is history really repeating itself?
Lead — The desk is positioning for a potential resurgence of inflationary pressures reminiscent of historical trends. Per the full note from ING Economics, the analysis suggests that a second wave of inflation could manifest, challenging current market assumptions about the persistence of price stability. The consistency of consumer price increases, particularly in key sectors, emphasizes the risk of inflation not simply being transitory but rather a systemic issue. Supporting evidence includes recent data points indicating that inflation metrics could surpass previous peaks, generating implications for monetary policy shifts. Notably, central banks may be compelled to reassess their strategies, particularly if inflation persists beyond the expected timeline. This could lead to a heightened sensitivity in FX markets, particularly for currencies sensitive to interest rate differentials. The alternative read would involve dismissing inflation fears due to temporary supply chain disruptions. However, the current pricing trends suggest that such disruptions may have longer-lasting effects, thus complicating this narrative.
THINK Ahead: Inflation’s second wave – is history really repeating itself?
The desk's thesis revolves around the evolving inflation narrative which recalls the stark inflationary environment of the 1970s, suggesting implications for current monetary policy. Per the full note from ing-think, while there are noticeable parallels in inflation spiking, the structural differences today warrant caution. Crucially, recent data indicate that inflation data is still high, with core inflation hovering around 4.5%, denoting persistent pressures that central banks must navigate. Given this context, traders should stay alert to upcoming policy signals from major central banks as they recalibrate their strategies in response to inflationary trends.
Rates Spark: Markets have shifted to a broader inflation impact
The desk's thesis revolves around the recent shift in market perceptions regarding inflation's broader impact on economic conditions. Per the full note from ING Economics, recent data has indicated a more persistent inflation trajectory, compelling markets to recalibrate their expectations surrounding central bank policy responses. Central banks, in turn, may need to adopt a more aggressive stance as inflation proves to be less transitory than initially perceived, with several indicators pointing to elevated prices persisting across various sectors. This sets the stage for potential volatility across currency pairs, particularly in response to macroeconomic updates as inflation data is likely to drive market sentiment.
Global 2022 Outlook - Still battling headwinds (Part 2)
The desk anticipates that the global economy will continue to grapple with inflationary pressures while seeking growth opportunities in 2022. Per the full note from Standard Chartered, economists Eric Robertsen, Razia Khan, and Edward Lee emphasize that inflation remains a critical concern, potentially impacting central bank policies and market dynamics. With inflation rates projected to remain elevated, traders should be prepared for volatility as central banks navigate these challenges. Our analysis aligns with the broader market sentiment but highlights specific growth sectors that may benefit despite these headwinds.