Stagflation Risks Are Again Clouding a Global Market Rebound

Fresh signs that major economies are slowing even as prices shoot higher cast a shadow over a nascent risk rally in global markets, just hours into the start of the new trading week.

Equities reversed course and came off highs after Chinese economic data released Monday showed a sharp contraction as Covid lockdowns stung. Wheat jumped after India restricted exports, adding to broader commodity price pressure.

In Japan, producer prices advanced at a double-digit pace for the first time in more than four decades. South Korean bonds fell after the central bank’s governor said a big interest rate-hike couldn’t be ruled out ahead.

Warnings about the fallout from faster inflation have grown louder. Bond market veteran Mohamed El-Erian said stagflation is the base line scenario for the US economy. Goldman Sachs Senior Chairman Lloyd Blankfein said a recession there is a “very, very high risk.” Analysts at the US bank have shifted their preference to better-rated Asian bonds over high-yield notes, citing concerns about headwinds for the global economy.

“The acceleration of the market pullback seems to indicate that investors are starting to anticipate a ‘hard-landing’ of the global economy,” said Charles-Henry Monchau, chief investment officer at Banque Syz in Geneva. “They fear that central banks will fail to tame inflation without triggering a recession or sharp economic downturn.”