Schroders PLC · LSE:SDR
Schroders — Schroders Secular Market Forum (June 2006)
14 slides from Schroders's conference presentation, Jun 6, 2006
Slide 1: Inflation or Deflation?
Schroders Secular Market Forum Dr DeAnne Julius Chairman, Chatham House Inflation or Deflation? Tuesday 6 June 2006
Slide 2: Inflation or Deflation: that is the question….
Inflation or Deflation: that is the question…. “Whether it is nobler in the mind to suffer The slings and arrows of potential inflation Or to take up interest rates against a sea of troubles And, by opposing, end it?” (with apologies to Hamlet)
Slide 3: Cyclical pressures v structural trends
Cyclical pressures v structural trends GDP Inflation rises GDP Growth trend Inflation falls Time
Slide 4: Cyclical Pressures (and lags)
Cyclical Pressures (and lags) • Liquidity overhang – 5 years of easy money (US, Japan, EU) – M3 up 9% in EZ; M4 up 12% in UK • Asset price rises – Housing (US, UK), stock markets (UK, EU) • Loose fiscal policy – Budget deficits high for this point in cycle – Little fiscal tightening likely (US, UK,
Slide 5: Oil Prices and Interest Rates
Oil Prices and Interest Rates “Once oil prices are demand determined they become part of the equilibrating process that slows growth. The markets are searching for a combination of the price of oil and the Fed funds rate that will constrain oil usage to the level of available oil supply. The higher
Slide 6: Oil Intensity
Oil Intensity Oil consumption/GDP 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0 Canada US EZ Japan UK China Source: BP, IMF
Slide 7: Offsetting Structural Trends?
Offsetting Structural Trends? • Asian labour – positive supply shock – Constrains wage pressures in OECD – But how long can profit share/GDP grow? – And how much income disparity will we tolerate? • Asian central banks – dollar prop holds US import prices down – External imbalances growing and prote
Slide 8: New Uncertainties
New Uncertainties • Where is neutral? – US: 3.5% real + 2.3% core CPI = 5.8% (5% today) – UK: 2.5% real + 2.0% CPI = 4.5% (4.5% today) – EU: 2.0% real + 2.5% HICP = 4.5% (2.5% today) • How tough is Bernanke? – Inflation credentials unproven – Can he lead the FOMC in uncertain times • Future path of
Slide 9: Old Uncertainties
Old Uncertainties • Margin of spare capacity – US: U falling to steady at 4.7% – UK: U rising gently to 5.2% – But wage pressures weak and profit margins strong • Extent of energy price pass-through (and crowding out) – US: core CPI and PCE both creeping higher (2.3, 2.0) – UK: core CPI = 1.3% v CPI
Slide 10: Meanwhile….. Global Imbalances
Meanwhile….. Global Imbalances • Likely to unwind or reverse – Models can’t predict when • Sudden reversals are possible – Triggered by events and driven by momentum • Some have political masters – OPEC, Asian central banks Best option for central banks not clear: 1. Anticipate to prevent 2. Accommo
Slide 11: Geo-political Clouds on the Horizon
Geo-political Clouds on the Horizon Iran Al Qaeda Gazprom Taiwan North Korea
Slide 12: Key Issues for the Fed
Key Issues for the Fed • Core inflation outturns • Financial market gyrations Likely action: rise, pause, rise
Slide 13: Key Issues for the ECB
Key Issues for the ECB • Spanish (and others’) inflation outturns • Inflation expectations survey • M3 behaviour Likely action: 50 bp rise, pause, pause
Slide 14: Key Issues for the MPC
Key Issues for the MPC • Quarterly GDP figures • Housing market • Behaviour of £ Likely action: pause, pause, pause
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