THIS WEEK WITH FRED DEMERS

Debunking the “second wave of inflation” fears

September 30 to October 4, 2024

THIS WEEK WITH FRED DEMERS

Debunking the “second wave of inflation” fears

September 30 to October 4, 2024

Commentary

Market recap

  • Equity markets pushed higher again this week, with a clear easing path for many global central banks helping to reinforce a soft landing.
  • The S&P 500 rose 0.6%, with materials and consumer discretionary leading the pack, while energy lagged alongside sliding oil prices.
  • WTI oil has now fallen below the $70 mark as a potential market-share skirmish brews, and that’s like doubling down on the good inflation news for the rest of the equity market.

Oil prices

Last week, Saudi Arabia unilaterally announced that it would increase oil production in December, adding downward pressure to already declining crude prices.1 The move had been widely anticipated due to some OPEC+ members being unhappy with current levels of output. However, a consortium like OPEC+ can only function if the players work together—if any member chooses to overproduce at will, the collective pricing power is undermined and the system falls apart. The combined output of all member countries has, for instance, exceeded their set thresholds by more than 600,000 barrels a day. More importantly, the increased supply represents another blow to the “second wave of inflation” fears. We have seen cooling demand across the globe, most notably in China. Now an increase in production from the world’s largest oil exporter—combined with a potential end to Libya’s blockade—could further depress prices at the gas pump, taking the wind out of inflation and giving consumers an extra boost of confidence.

Bottom Line: Declining oil prices could further quell inflation and buoy consumer sentiment for the remainder of 2024.

China’s stimulus

When economic growth falls, as has recently happened in China, the number one priority is to find a floor. The Chinese government is attempting to do this by injecting a stimulus package designed to lower borrowing costs and shore up the struggling housing sector.2 While the running joke among investors is that stimulus has been trickling in for years, the shift in policy means more resources will be deployed to put a bottom on worsening confidence. Will the policies fix any of China’s structural issues? Unfortunately, no. However, our team is debating whether there are short- to medium-term opportunities in favour of EM and China after the recent rounds of stimulus. Longer-term, there are still reasons to be more cautious on China. The country continues to face longer-term challenges, including a balance sheet recession that greatly resembles what the United States went through post-2008. At the time, low interest rates from the U.S. Federal Reserve did little to stimulate consumer demand because the deflation in home prices had caused significant damage to household wealth. The extremely high personal debt levels made it difficult to repair the individuals’ balance sheets. China now finds itself in a similar situation and the monetary easing currently underway does not resolve that issue, nor does it erase the possibility of escalating trade tensions with the United States, which could further weaken overseas demand for Chinese-manufactured goods.

Bottom Line: China’s recent stimulus should be seen as a short-term positive for markets, both domestically and internationally.

Consumer confidence

U.S. consumer confidence dipped again in September, reflecting broad negative sentiment on the demand side of the economy.3 However, unless these numbers move substantially, they should always be taken with a grain of salt. The biggest shift came in 2022 as a reaction to a sudden rise in interest rates—but since then the data has been roughly level, albeit slightly choppy on a month-to-month basis. One of the main causes is the cumulative effect of inflation. Consumers have felt the pain in their grocery bills, mortgage payments and car loans, which has contributed to an overall feeling of gloom. It’s important to remember, however, that we are not witnessing recessionary dynamics. Employment is still fairly strong, and while businesses aren’t looking to hire quite as many people, there’s little evidence of widespread layoffs or that people are afraid of losing their jobs. The same is true for corporate earnings. Profit margins have remained at historically high levels despite the apparent drop in consumer confidence, unlike in 2022, when softer demand forced them to begin cutting expenses.

Bottom Line: Far from being scary, the lackluster consumer confidence is actually part of a normal, healthy economic process.

Positioning

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled Riding the tailwinds of September storms.

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