The war in Ukraine has caused a jump in commodity prices that will trigger a further increase in inflation and will weigh on GDP growth. Unsurprisingly, the narrative that stagflation is in for a comeback is gaining ground, as shown by the increasing number of media references to this topic. Stagflation is a multi-year phenomenon of high inflation and a high rate of unemployment. Although inflation is high, the other conditions are clearly not met today. Monitoring financial markets developments is useful in gauging whether stagflation risk is on the rise. This can be done by comparing the developments in breakeven inflation and the high yield corporate bond spread
The global manufacturing PMI moved slightly higher in February on the back of a sizeable increase in the US and a slight weakening in the euro area where the index improved strongly in France and declined in Germany. Brazil and Mexico recorded better data but the index is still below 50. The PMI in China improved and crossed the 50 line.
Unlike the European Union, which is relatively dependent on Russian energy, the United States does not have the highest exposure to the shock. As the world’s leading hydrocarbon producer, the US can even offset the shortfall of Russian production, at least partially. But in a more uncertain environment that is less propitious for spending, the US economy will not be sheltered. Looking beyond the stock market decline, a few business climate indicators, including the Philly Fed Index and the Empire Manufacturing Index, have already begun to signal a less euphoric environment.
First of all, we will pay particular attention to the extent of the upward revision of the European Central Bank's inflation projections. We expect major revisions given the latest developments and the most recent inflation figures, which continue to rise (headline inflation hit 5.8% y/y in February, according to the Eurostat flash estimate, and core inflation was 2.7% y/y).
The number of new Covid-19 cases continues to decline in most regions of the world. Moreover, retail and leisure traffic held to an upward trend in Spain, Belgium, France, Germany, Italy, the UK and the US, even though some declines were observed for the most recent data points. In Japan, retail and leisure traffic continues to improve.
