A few weeks ago I shared why I think the worst may soon be over when it comes to inflation, interest rates and the peso.
Today, I am more convinced that inflation and interest rates will soon come down for the following reasons:
Commodity prices continue to fall. In fact, the price of industrial raw materials such as copper is now below end-2021 levels, while the price of oil is close to pre-war levels in Ukraine, even as the conflict with Russia continues. With the falling prices of raw materials used in the production of goods, there is less pressure on manufacturers to raise selling prices and workers to demand higher wages.
The US economy is also slowing down. Earlier this month, S&P Global revealed that the Flash US Composite PMI (Purchasing Managers’ Index) fell to 47.5 in July from 52.3 in June. Note that a reading below 50 signifies contraction.
The Flash index of US services business activity and the Flash index of US manufacturing production were very weak at 47 and 49.9, respectively, the two lowest in two years. Excluding the pandemic-related months of lockdown, these are levels not seen since the 2009 global financial crisis.
Another indicator that the US economy is weakening is its second-quarter gross domestic product down 0.9%, after contracting 1.6% in the first quarter. This could potentially mean that the United States is in a recession. Weaker demand should weaken companies’ ability to raise prices, helping to calm inflation.
Global central banks are also becoming more hawkish, raising rates to defend their currencies amid a very aggressive Fed. After the United States revealed that inflation in June had accelerated further to 9.1%, the Bangko Sentral ng Pilipinas announced an off-cycle rate hike of 75 basis points, surprising the market. Other global central banks also hiked rates, with the European Central Bank raising rates 50 basis points higher than expected for the first time in 11 years.
Falling commodity prices, combined with signs of slowing economic growth and central banks’ desire to fight inflation, are convincing more and more investors that inflation will soon trend lower.
This is why the 10-year bond rate in both the United States and the Philippines fell significantly last week, even as the Fed raised rates another 75 basis points. The greenback also weakened despite Fed action, allowing the peso to close below P56 last week after depreciating sharply over the past two months.
Given more convincing signs that inflation and interest rates will soon come down, now is the time to buy fixed-income assets such as bonds and real estate investment trusts (REITs) to lock in returns. higher. However, stick to high-quality bonds and REITs, as slowing economic growth will hurt the ability of some issuers to meet their obligations. INQ
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