A Tale of 2 Economies

Ian Reynolds July 1, 2023

Capital markets are now focused on

US recession less likely
Sticky inflation abounds despite rumours of deflationary bust
Will full employment continue globally

A Tale of German & Spanish Economies

Spanish Consumer Price Index (CPI) YoY

Headline YoY CPI craters in deflationary bust (good headline)

But Core YoY CPI for Spain is a different story

Still way too high but on the correct trajectory.

While over in Germany headline and core YoY CPI showed uncomfortable stickiness, and of course Germany is in a recession.

No alt text provided for this image — Germany GDP

The above charts show that "the great deflationary bust" is not yet on us. The supply shock and commodity inflation from the pandemic have now passed through the system but wage and housing inflation arew making core inflation sticky.

The US, with the fastest and more aggressive hiking cycle sees inflation plateauing but not yet really coming down in the core indicators.

U.S. Core PCE Price Index YoY

The EU has, for once, done a good job communicating their purpose but still have some hiking to do with short rates at 4%.

Australia and UK central banks are hopelessly behind the curve but at least are now showing some resolve (that could change).

Economies are more resilient than market commentators have expected and it's becoming a very polarised bust when it does come. Those individuals, companies and countries with a lot of debt are going to be in a world of pain but those high net wealths and companies sitting on piles of cash are going to be just fine. There are pretty much no countries that this applies too - maybe Brazil ?

Banks, Terribly-Designed Stablecoins [Pantera]

Rioting in France, Belgium and now Switzerland [BBC]

Wall Street’s ‘Crystal Ball’ Shatters as Stocks Stage Big Rall [Bloomberg]

Bundesbank may need recapitalisation to cover bond-buying losses [FT]

FED Reverse Repo Drops - Money Market Funds Buying Treasury Bills [NY FED]