On April 28, the U.S. Commerce Department estimated that the growth of the U.S. economy was the weakest since spring 2020, in essence shrinking unexpectedly.
Despite the latest news, global stock markets have regained some sense of calm after a choppy trading month in March, however, government bond markets are now flashing warning signs. The signs point to stagflation which is an inconvenient combination of high inflation with low economic growth.
Welt’s analyst Holger Zschaepitz shared a chart that he believes flashes a stagflationary alert for the U.S. economy.
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“US Economy unexpectedly shrank in Q1, the first contraction since 2020, as ballooning trade deficit & softer inventory growth belied an otherwise solid consumer & business demand picture. GDP fell at 1.4% annualized rate after a 6.9% pace of growth in Q4 2021.”
Inflationary and stagflationary warning signs
In Europe, inflation is at a record high, with U.S. and UK inflation at a multi-decade high with expectations of consumer prices to keep going up as the war in Ukraine pushes oil and gas prices in the EU to unimaginable levels.
Inflationary concerns have been particularly acute in Europe; few anticipated that it would get to levels as high as they have already, on the plus side, it seems that the inflationary print does not have much space to run wild. This is best encompassed by a speech given by ECB’s Schnabel on macroeconomic and policy challenges, in which he briefly states that challenges caused by the war in Ukraine are sure to ramp up inflationary pressures.
While new lockdowns in China, a global trade hub, have the potential to cause delays in shipments of products and put further pressure on global supply systems.
In such an environment, institutional investors might choose to hold long positions in inflation, which would make sense given the fact that inflation seems to be here to stay for the foreseeable future. What investors can take away from the events of 2022 is that remaining on their toes and monitoring all areas of the market before making decisions may well be the most sensible course of action.
