Chart of the Week: Expectations of disinflation

Investors in the inflation swaps market are expecting sharp disinflation across the major economies this year. In the case of the US, market pricing through last month implied a fall of some five percentage points from 7.1% in November 2022 to just over 2.0% in November 2023. As our chart shows, investors failed by some margin to appreciate the speed at which inflation would rise over the past two years; but they now appear confident it will fall sharply from here. The speed of the disinflation that is priced in is the fastest we have seen since the global financial crisis; before that, we must look as far back as the recession of the early 1980s for a similarly steep decline. Could the US really disinflate that rapidly, and still avoid recession? That is what equity investors are hoping for; and there is plentiful evidence that the market is pricing in a Goldilocks scenario of low inflation and strong growth. Consumer staples stocks, for example, which are usually popular in times of heightened uncertainty, have underperformed consumer cyclicals (typically preferred in times of economic recovery) by 12% so far in 2023. Similarly, macro-sensitive stocks such as copper mining have gained significantly in recent months, and Fathom Consulting’s Fathom Macro Portfolio (FMP) is showing a positive trend in its macro cycle, indicating reduced concerns about a recession. For us, this is too optimistic – curbing double digit inflation almost always requires pushing the economy into a recession.

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The views expressed in this article are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.

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