Inflation? Jobless claims will be the beacon for investors

by Adrian Owens

Commentary by Adrian Owens, Investment Director Global Macro and Currency Fixed Income at GAM Investments

Undoubtedly, the main theme today is inflation. Historically, in periods when inflation has been very high, public debt has generally been high.

This is also the case today and it is important to remember that it is in this scenario that central banks are trying, with delay, to bring down inflation. For years, major central banks have injected liquidity into the system. In our opinion, they have slept on their laurels because inflation has remained low for a very long time. They have practically forgotten that it takes time for monetary policy to act, and the effects are variable. They have fanned the fire of inflation. The pandemic has been the fuse. Now, however, the situation has worsened and spread in a generalized way.

Unfortunately, we are in a situation where excess liquidity in the short term and other more medium-term factors are all rowing in the same direction, so it will become increasingly difficult, compared to the past, to slow down inflation. Demographic dynamics don't help. In 2000, China placed about 15 million workers on the labor market a year. Today it loses between 1 and 2 million. In other advanced economies, labor participation has also declined. Climate change, ESG factors, are all elements that make us think that inflation will be higher than it would otherwise be. And of course the situation in Russia and Ukraine also does not help. What does it mean? In our view, it means that core inflation is persistent and falls much more slowly than the market generally expects. Of course this affects the market, in the sense that today the market predicts that interest rates will rise for a while longer, then central banks will begin to reverse the trend.

One area we will focus on to monitor the situation is the labor market and, in particular, the labor market in the United States. Because it's a key market. But if we had to choose a single figure, we would probably look at unemployment claims. They are one of the most precise indicators that we can examine.

A substantial increase in demand would be an encouraging sign, because we would at least begin to detect a certain weakness in the labour market that would ease the pressure on the inflationary front a little.