It’s been a while since I ran through my favorite charts for the global economy. I am happy to report that nothing much seems to have changed since my last overview. Markets are still enjoying a soft landing, defined as a world in which inflation is drifting lower, even if still-sticky in key areas, the global economy and labor markets remain unencumbered, and monetary policy is on track to ease modestly.

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More immediately, a run of softish inflation data in the US, rising jobless claims—despite still solid non-farm payrolls—and the return of political uncertainty in Europe have driven a bond rally in the past few weeks, and raised questions about the strength of the US economy. As a result, markets are now pricing in slightly more aggressive near-term policy easing from the major central banks. In the US, SOFR futures imply 75bp worth of easing from the Fed this year, and similarly for the ECB, which includes the 25bp cut that the Bank delivered last month. Yields also have softened in the UK. The consensus expects a second rate cut from the ECB in September, at which point markets believe Frankfurt will be joined by the BOE—with many speculating on an August cut from Bailey et al—and the Fed. The first chart below plots the implied policy path for the Fed and ECB using SOFR and Euribor, respectively. This is a pleasant picture overall. Rates will remain higher than immediately before the twin-shock of Covid and an inflationary shift geopolitics, but they’re still on track to come down some 150bp from their highs.

In bond markets, yield curves remain inverted, though they have steepened a touch recently. Fixed income volatility is still falling, but the combination of bear-steepening and inverted curves is incessantly warning about a spike in the MOVE, but it isn’t happening, yet.

This waiting game for major developed central banks to get easing under way is happening in the context of a global policy easing cycle that is already well underway. The first chart below shows that my index which counts the number of central banks hiking and the difference between hikers and cutters, on a six-month basis, suggests that global monetary policy has been easing since August last year, which just about coincides with the end of hiking cycles in the US and Europe. I concede that it is difficult to speak of easing global monetary policy without the joint participation of the Fed, ECB and BOE, but the second derivative matters too. The net tightening of global monetary policy ended almost a year ago. This, combined with expectations of further, albeit modest, easing over the next 12-to-18 months, has driven a rebound in global leading indicators. The second chart below plots my composite leading indicator index for the global economy alongside a market-based indicator designed to capture the most cyclical parts of the equity market. Both suggest that the global economy was enjoying a decent cyclical recovery midway through the second quarter. The response of the economic data in Europe to rising political uncertainty in France, and the prospect of a downshift in US growth will be key tests for this trend in Q3.

To summarize: interest rates in the major developed economies are about to come down and underlying cyclical conditions in the global economy are improving. What’s not to like? As it turns out, there could be several things. If we’re currently living the soft landing, we should think about the potential path to a hard landing. The two most obvious are; firstly, that inflation remains too sticky for too long—or perhaps starts rising again—forcing central bank to impose a hard landing on the economy to bring inflation down. The idea of a kinked Philips Curve is one way to think about this. Secondly, it is possible the soft landing we’re currently enjoying is simply a proverbial Wile E. Coyote moment, and that the seeds for a hard landing have already been sown by the sharp increase in interest rates since Covid.

The first of these paths to a hard landing is tied to the outlook for inflation, and whether central banks, and perhaps our economic structures and institutions more generally, can live with inflation slightly above 2%, and if so, what degree of slippage is covered by “slightly” in this context. Markets have been focusing intently on inflation in the past six months, turning over every detail and percentage point in data for evidence of where the numbers go next. As it turns out, however, the picture from a bird’s eye perspective hasn’t shifted much. My GDP-weigthed index of inflation in the US, Eurozone and UK fell to 3% in November last year, and it hasn’t really moved much since. Core inflation, by contrast, has continued to drift lower on the same measure, but the decline has stalled in the past few months—with the latest data for May—at just over 3%.

The expectation for inflation embedded in market pricing for interest rates and bond yields is that inflation will soften further, but details matter. The difference between 3%, 2.5% and 2% matter for policymakers, and leading indicators increasingly suggest it could be closer to the higher end of this range. More specifically, survey data, commodity prices and inflation at the tip of the global industrial value chain—proxied by China’s PPI—suggest that underlying inflation pressures are now firming.

One way to reconcile this picture with market pricing is that the inflation charts above are consistent with just a little of bit of easing—an adjustment from very tight to slightly less tight policy—which is exactly what markets are pricing over the next six months. So far, so good. But that still means the key question for investors is how much central banks will ease in the next six-to-nine months, not whether they will ease at all, or whether they might even have to lift rates. Inflation wouldn’t have to shift much to the upside, or simply refuse to fall in line with expectations, before markets would have to contemplate the latter two scenarios as something more than a dim and distant tail risk. This week’s upside surprise in inflation in Canada and Australia, the latter which even have some analysts now expecting the next move from the RBA to be a hike are cases in point.

The key question more generally is how central banks will react to a world in which inflation does not make a perfect landing at 2%. Will they tolerate above-target inflation without putting a further squeeze on economic activity, and if how much above target? We can’t yet be sure.

As for the risks that the global economy is currently performing a Wile E. Coyote, the problem is that figuring out how long gravity will be suspended, and in what parts of the economy and markets it will re-emerge, is tricky. At this point I am reluctant to second-guess, or preempt a downturn in, my market and data-driven leading indicators above. As a result, my conclusion is that the soft landing lives, for now.

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