Macrocast

The west is (trying to be) back

Key points

  • The conclusions of the G7 summit, albeit not immediately actionable, can be read as a “West is back” manifesto. Still, for this “Cornwall consensus” – heavy on active economic policy – to thrive, central banks must refrain from pulling the brakes. We look hard at the latest US inflation figures and still consider the Fed can remain patient, just like the European Central Bank (ECB) was patient last week.

The G7 last week truly turned the page on the populistic “Trump era”. Observers were quick to criticize the lack of ambition in terms of concrete commitments, but even successful G7 meetings merely set the tone and give general policy directions rather than produce immediately implementable action. The flavor from Cornwall was definitely of the “liberal/progressive” variety. Beyond the obvious focus on the pandemic, fighting climate change, free and fair trade and inclusive growth were the common leaders ‘priorities beyond their political diversity. On economic policy, the “Keynesian conversion” looks complete. The West is more unified and can more easily project its values on the international stage through renewed multilateralism. Still, many policy directions agreed last week will need to pass the “G20 test”. From this point of view, China is the “elephant in the room”. The tone on China was “firm” but very vague on any concrete follow-up. While Biden has managed to narrow the gap with Europe on this issue, nuances still abound. Maybe more fundamentally, while the West may be back “ideologically”, the crucial question is whether it will have the financial resources to win the argument at the global level. The G7 countries are exiting from the pandemic with high levels of debt and lots of internal grievances to tend to, while China is emerging with much of its fiscal and monetary capacity intact.
The “Cornwall consensus” can thrive only if central banks are not forced to pull the brakes. Reassuringly, the market is remarkably non-plussed by the further spectacular acceleration in US inflation. What helps may be the fact that it is still straightforward to attribute the spike in consumer prices to contingent, sector-specific causes which are not “generalized overheating” material. For the time being, the Fed can fairly comfortably maintain its patient stance. In the months ahead we will focus on any sign of “contagion” to a wider array of consumption items, but our baseline has not changed: while inflation is unlikely to return to its sub-par pre-pandemic pace (which would be a good thing), we see little reason to shift away from the “transitory shock” narrative.
The ECB chose to be patient as well last week, refraining from signaling a deceleration in the pace of purchases, as we expected. We don’t see the forecast upgrade as sending a hawkish policy message. What remains crucial is that the central bank still expects core inflation at the policy-relevant horizon to be significantly lower than the already sub-par pace they were forecasting before the pandemic.

This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities. 

It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. 
All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document. 
Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.