Global economic picture looking increasingly bleak in the near term

What seemed fairly evident from the earnings season just passed is that inventory levels have been surging as corporations are scrambling for supplies given continued disruptions, adding yet another layer of complexity to forecasting corporate earnings this year. Rising input costs, especially in Japan where the weak yen is exacerbating these problems leave visibility in our own market even worse while spectre of stagflation looms large on the world’s biggest economies. 

With China’s lockdowns this quarter likely to have accelerated these inventory build-ups just when end-demand for durable goods is showing notable signs of slowdown as inflation eats into household budgets, dangers of bloated stock levels leading to big inventory write-offs are rising. Moreover, we suspect inflationary pressures are likely to be increasing felt in the service sector in the months ahead as much of the post-Covid discretionary spending in the West has shifted towards travel and leisure which is leading to severe labour shortages. 

With BOJ retaining its ultra-loose monetary policy, leaving it as one of the only major central banks that continues to deem inflationary pressures as transitory, despite Japan’s inflation gauge surpassing the long targeted 2%, we think risks of monetary policy errors have risen considerably. Although the yen has stabilised recently against other major units, we suspect rising inflationary pressures will add more downward pressure on the yen, creating a vicious circle that in our view can only be broken by BOJ ending its interventions in the JGB market that have artificially suppressed long term interest rates. 

Although geopolitics have taken a back seat in markets more recently as investors grapple with the increasingly murky global economic backdrop, we think risks in this domain remain fairly elevated. China’s refusal to condemn Russia has further weakened its global standing and have made Western policy makers more hawkish about their future China policies. Moreover, China’s Covid-zero strategy which looks unlikely to be abandoned until more effective home-grown vaccines are launched has also only reinforced the need to move supply chains out of the region.

Meanwhile, NATO’s aiding of Ukraine in its war against Russia is becoming ever bolder, supplying it with heavy artillery to help even the odds in the battle for Donbas but also to aid Ukraine in freeing the Black Sea trade from Russia’s military blockade which have led to global food shortages. This has left Putin dangerously isolated and out of options. Some observers believe this scenario has drastically raised the possibility of a tactical nuclear retaliation by Russia while others think such a directive by Putin could lead to his demise by the hands of his own generals.