Chart of the Week - Clues from small central banks

June 08, 2022 09:10

Topdown Charts

Rate Hikes on the Frontier of the Global Economy: This is one of my favorite charts, and one that helped get us onto the right side of the global policy pivot that has rippled across markets this year.

The chart tracks interest rate moves by the smaller/developing country central banks: I like to keep tabs on this group as they tend to be more sensitive to the ebb and flow of global growth and inflation tides.

They also tend to fall under the radar, so it’s one of those undercovered and underappreciated sources of information.

While some might argue that central banks are powerless to stop what appears to be simply supply-driven inflation sweeping the globe right now, the thing is we can’t talk price with out talking *supply* AND *demand*. And therefore we can’t say that the big wave of easing in 2020 wasn’t at least partly to blame for surging inflation. Either way, a clear reality is the global policy pivot from panic cuts in 2020 to near-panic hikes in 2022 in effort to get inflation back under control.

This pivot to rate hikes, along with acute cost pressures, general tightening of financial conditions, and geopolitical shocks raises the odds of a near-term global recession. And we’ve got at least 17 charts which point in that direction!

But with all this talk of inflation and recession risk, it’s important to remember these things go in cycles. In that respect we will continue to watch this chart very closely for any signs of a turn in the *other* direction. If we do get a recession and taming of inflation that will ultimately mean an eventual pivot back to easing and better times ahead for markets — and that’s going to show up clearly on this chart.