For more than a year ‘Team Transitory’ – i.e those like me who see the long term trend of ever-lower (or at least low) interest rates and inflation – have been in retreat under a constant barrage of inflation surprises and central bank rate hikes. But this week the tide turned, at least for a week, including:commodity prices fell sharply towards their pre-Ukraine war levels of late February on signs the spikes in March, April, May and June had created ‘demand destruction’ and were likely to cause recessions in the United States and Europe later this year or early next year;US inflationary expectations for the next five years continued dropping below 2.5% and the US 10 year Treasury yield dropped solidly 3% for much of the week, albeit it closed above 3% on Friday nightUS 30 year mortgage rates, which drive a lot of activity in the world’s largest economy, fell to 5.3% from 5.7%; and,ANZ, BNZ and Westpac and finally ASB cut their two year mortgage rates around 30 basis points to around 5.4% after NZ’s wholesale interest rates followed the global trends and fell 50-80 basis points over the last three weeks. In my view, it’s probably too early for ‘Team Transitory’ to declare victory, but some faith is being restored in my long term view that low inflation and interest rates will reassert themselves after the Covid and Ukraine war shocks because of fundamental global macroeconomic forces that include;ongoing globalisation of manufactured goods supply chains, which is still largely intact despite the exit from Russia and fears about China;the evaporation of services industries globally into AI-driven and jobless clouds;the continued weakness of labour negotiating power with increasingly large (and monopsonistic) companies; and,the widening of the gap between the extremely rich and the ever-poorer poor in developed countries is continuing to generate growth-sapping wealth gluts and restraining productivity growth as the poor’s kids get sicker and less productive as adults. Falling inflation and interest rates again put upward pressure on asset prices and rentier incomes, creating a feedback loop that worsens inequality and adds to the political pressures eroding democracies and undercutting efforts to fight climate change. New social contracts and political change to redistribute income and wealth are needed to reverse these awful and perverse feedback loops, in my view.

Source: Stuff July 10, 2022 08:24 UTC