Business Cycle Update: There are only CYCLES and Rate of Change, No Market Prophets

This week’s post discusses where we are at in the business cycle. Inflation expected to peak in H2/2022. As inflation is a lagging indicator, past price changes may be used to help forecast inflation (we have included our model in the attachment below). Changes in monetary policy has tended to take some time (between 12-24 months) to reflect its impact in inflation.

World Trade Volume appears to be slowing = Deflationary impulse (Expect lower USD Liquidity/higher US dollar(DXY) ahead). We started to see economic sensitive commodity price momentum slowing (i.e. copper) as it appears to have peaked in May and rolling over as liquidity (Central Bank and Private Liquidity) continues to decline. China’s central bank liquidity growth has been tightening as well, which tends to be correlated well with growth in commodity prices.  

Historically, Labour (wages) and commodity prices tend to be the last measures to peak and rollover before a recession. The June Jobs report was released late last week. Nonfarm payrolls increased 372,000 in the month, better than the 250,000 Dow Jones estimate. Employment continued to grow in June. However, we are always looking for changes in trend/momentum, and there are some signs that the labour market may be rolling over soon as the marginal cost of labour (Job Openings/Unemployment Level) appears to be peaking for the cycle. Job Openings may have peaked in April 2022 and have declined in May and June. We see wage growth has potentially peaked while unemployment rate is at a trough. Initial Jobless Claims have also been rising since April 2022 month-over-month and average hours per week and overtime hours per week, declined slightly from May.  

Despite lower growth impulse, Central Banks are expected to maintain hawkish stance until inflation pressure subsides and rate hikes are expected to chase inflation prints (which are lagging indicators). We do not expect a Central Bank pivot despite lower growth trajectory, until inflation is sustainability under control. In such an environment, the US dollar is expected to strengthen. 

Beowulf ‘s Treasury Tactical Asset Allocation portfolios have been in the Safety portfolio based on BT Global Risk indicator since January 2022, as result of slowing momentum in Global Liquidity (Current Holdings: UUP, TFLO, SHV). See Beowulf’s Armory for Updates to the Model Portfolios for July 2022 positions.

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