Global inflation might be the biggest theme of the week. A lot of people were caught up in the NVIDIA, Walmart & Target earnings reports, but my biggest takeaway was what happened in, no surprise, Japan! In October, core inflation excluding food and energy costs rose to an annualized rate of 2.3%, the highest reading since April. This continues a steady uptrend in pricing pressures that has seen this rate climb from 1.9% in July to 2% in August to 2.1% in September to the current 2.3% level. This rate, which is closely watched by the BoJ, is now above its long-term target and trending in the wrong direction. The markets have been underpricing the odds of a December rate hike due to continued sluggish growth rates. If the BoJ reacts to this inflation reading and hikes unexpectedly in December, this could be the December surprise that triggers another reverse yen carry trade and potentially sinks equity prices.
Global PMI readings released last week show that the United States might be the only economy generating real growth right now. In Japan, the services sector barely pushed into expansion again, but the manufacturing sector remains very weak, a theme that most countries are experiencing right now. Europe looked like it might be turning in the right direction earlier this year, but the latest economic activity numbers don’t paint an optimistic picture. Japan is still teetering on the edge of expansion and contraction, which means that it could be headed for a stagflationary period that destroys everything in its path.
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