Hello and welcome to our video MacroMemo. There is, as always, a lot to cover off.

And so, for the next few minutes we’ll be talking briefly about COVID-19, as usual. We’ll also talk, though, about wheat prices, the extent to which that sharp decline we’ve seen in recent months is appropriate or not. We’ll take a look at geopolitics, most importantly, at that U.S.-China relationship, which did get dinged in recent weeks. We’ll of course turn to inflation, and we expect inflation to get a little softer in the July data that’s out imminently, at least as I record this. We’ll talk business cycle, which is moving very fast indeed. We’ll of course look at some economic data. And we’ll finish with a glance at public policy, both some fiscal policy developments in the U.S. and some monetary policy developments in a more global context. So, lots to cover off.

Let’s start with COVID-19. And so, the latest COVID wave, the seventh wave by some standards, though it depends by the country, it is seemingly peaking and even declining across Europe and the UK. And so that is a happy event, though certainly not yet low. Perhaps starting to see something of a peak in North America, in the U.S. and Canada, though that’s really code for saying the infections are fairly high right now but no longer actively rising. So hardly a good spot, but maybe we’ll see a turn there.

Fairly mild waves, I must say, so far across most of the world, relative in particular to the two prior waves, which had been quite intense. The exception, though, is Japan. And so Japan is experiencing a wave far worse than any other it has experienced so far. And I guess the logic behind that is just that Japan has significantly less immunity because it did such a good job of protecting itself to prior waves. So it’s playing a little bit of catch-up right now.

We still think more waves are likely coming; additional mutations occur. Probably fairly mild economic consequences, and not the major economic impacts some of the initial waves had. So a sideshow to the global economy right now.

Let’s turn to wheat. And so wheat prices are down sharply. In fact, agricultural prices more generally. But let’s focus on wheat for the moment. In fact, wheat is now down to a lower price than it was before Russia invaded Ukraine, which is counterintuitive when you think about Ukraine as the world’s third-largest exporter of wheat. And so, what is going on there? Is this a reasonable decline in prices?

Ultimately, it seems as though the answer is probably yes. This is reasonable, though it’s a little bit surprising. The math works like this: Ukraine normally produces around 33 million metric tons of wheat per year. The global market, though, is a whole lot bigger. The global market for wheat is about 800 million metric tons per year. And so Ukraine, a big exporter, but ultimately, only 3% of the global wheat supply. And it looks like Ukraine will actually produce about two-thirds of its normal output. And so what we’re really talking about is losing 1% of the global wheat supply.

I wouldn’t want to downplay that or underestimate that. That can have very big impacts on the particular countries that were reliant on Ukraine, including many in Africa, the Middle East, and some in Central Asia. But it is ultimately 1% of the global wheat supply that we’re missing. And it seems as though some countries, including Russia, China, U.S., Canada, and Australia, seems as though those countries are actually having bumper crops this year, such that the gap may ultimately be filled. And so, in the end, it probably makes sense that wheat prices and food prices have come down. That’s hopefully a sustainable thing, and that’s, of course, very good for getting inflation back under control.

Let’s turn from there to geopolitics. And so, it’s a time of high geopolitical stress. And that’s true, of course, in a Russian context. That is true in the context of Israel and Palestinians, and there was a recent cease-fire there, but stresses remain high. Of course, the Taliban took over Afghanistan after the U.S. exited. Iran seems to be very, very close to nuclear weapons.

But of greatest long-term relevance, arguably, still that U.S.-China relationship. And it’s now a multipolar world, and China is very much a global superpower. China is angry at the U.S. right now because the U.S. sent a senior politician to Taiwan, which China claims as its own. And so China responded by halting communications on a number of critical policy matters. China has been conducting quite intensive military drills in the area. And so it’s not a happy situation for the moment.

We still think it’s quite unlikely that China actually invades Taiwan in the near or medium term. A conflict would be extremely costly militarily. It would be extraordinary costly from an economic standpoint. We’re talking about an order of magnitude, more economic damage to the world than the sanctions that were imposed on Russia. But we can see that, based on polls, the Taiwanese people are strongly against joining China at this juncture. And Chinese President Xi has a reelection this fall, and so unlikely to do anything too drastic over the coming months.

And so we think, in the end, China is quite unlikely to invade Taiwan, but there is a risk. The risk is arguably a little higher than it was as of a few weeks ago. And it is a high-consequence risk. So it can’t be ignored, but again, we think ultimately it’s quite unlikely in the next few years in any event.

On the subject of inflation, of course, the debate remains whether high inflation is finally peaking. We tend to think it is. That doesn’t guarantee it declines happily and persistently from here, though it might. But nevertheless, we do think it’s peaking at this juncture. And the July inflation data that is on the cusp of being released, at least as I record this, does look likely to align with that view. It’s likely we get a monthly CPI print in the U.S. that’s running, quite literally, about six times slower than the one in June, and a big reason that commodity prices turn fairly aggressively from June into July.

And I should say, theoretically, it does make sense that inflation is in the realm of peaking. And that’s because the four big inflation drivers have all turned. And so, monetary stimulus has turned into monetary restraint as rates go up. Fiscal policies becoming less generous; indeed, I’ll elaborate on that in a moment. I can say that supply chains are getting a little bit better, and commodity shock is seemingly ebbing a little bit, as per the discussion of wheat and as per lower commodity prices on a number of fronts.

And so, we can look forward to that, though I will warn that the improvement in the rate of inflation from there is likely to be fairly gradual. And so even if we get a pretty lucky and happy string of decelerating inflation prints from here through to the end of the year, we still think we’re likely to have an annual inflation rating of about 7.5% in December. And that’s still a long way from normal. So it’s going to take quite a while to get those yearly figures back to more familiar terrain.

On the business-cycle front, I can say that we have seen a huge leap forward in our assessment of the U.S. business cycle. A quarter ago, when we last updated our scorecard, it said we were mid-cycle, though there were some late-cycle influences very much showing themselves. This quarter, we have leaped right past late cycle. We’re seeing end-of-cycle claims. End of cycle is the best guess. And so end of cycle is normally a point at which you’ve got maybe a quarter or two left before recession, but not a whole lot of time. And so that’s what the business cycle is telling us right now.

And metrics like where we are with inventories and where we are with inflation and what we’re seeing in terms of wage growth starting to roll over. And those sorts of metrics are all quite consistent with an end-of-cycle type of interpretation. So that’s lining up with our view that a recession is indeed likely over the next year.

On the economic front, we’re still broadly seeing economic weakness. I would concede that one exception to that was U.S. payrolls were still pretty strong. But if you dug into the details, the household survey wasn’t quite as good. And maybe more importantly, we are still seeing some softness in other employment metrics. Those are starting to roll over, including jobless claims now going up, layoffs now also going up, job openings now starting to come down, and hiring intentions coming down as well.

So we do think we’re going to see some employment weakness. It’s been popular to claim that, because job openings are so high, and there are about 10 million job openings in the U.S., that maybe layoffs won’t have to happen because instead, companies can just decide to hire less and reduce, essentially, their job openings. There is something to that, but in the end, history shows us quite clearly that a high level of job openings doesn’t save the world from layoffs if a recession happens. And so, if we get a recession, we should still expect some job losses. Probably fewer than you would normally get, but nevertheless, we’re budgeting for some labour market weakness in that scenario.

From a policy perspective. Well, fiscal policy, the U.S., I would say, improbably, is now actually advancing and has passed through the Senate, is likely to get all the way to law, a reconciliation bill that includes some tax hikes, including a 1% tax on corporate buybacks, including a minimum 15% tax on U.S. corporations. And so those had looked rather doubtful as of just a few weeks ago. And those are coming forward. They are being paired with some climate change spending initiatives, some more money for health care, some more money for IRS enforcement.

But net-net, this is actually a restrictive piece of fiscal policy. This is something that’s taking more money out of the economy than putting in. And so it’s consistent with the idea that the economy should slow. It’s also consistent with the idea that inflation should come down somewhat.

And then pivoting to the other side of policy, from the fiscal side to the monetary side. I can say central banks obviously still in the business of raising rates. The U.S. Federal Reserve raised rates by 75 basis points just a few weeks ago. And so that was broadly expected. They’re expected to do another of those in September. Bank of England raised rates by 50 basis points, and it’s being quite explicit in its expectation of a pretty profound recession in the UK. And it thinks British inflation peaks at 13%, which is a lot higher than most other countries.

And so, we are still very much in a world of monetary tightening, though I should say, we do believe the tightening can slow somewhat going into the fall. So we think we’re probably at peak velocity right now, if not at peak policy rates just yet. And I would emphasize, as I’ve said before, that we do think policy rates are going to overshoot a bit. They’re going to go beyond their neutral level, and there’ll be some room probably in the second half of next year for policy rates to then start to come a little bit back down, though not all the way back to the zero-type levels that prevailed as of around six months ago.

And a last thought within that realm of monetary policy and public policy more generally is just we are still pretty firm in our view that Canadian rate sensitivity is higher than it is in the U.S. And that’s really just a statement that Canadian households have more debt, and Canadians have more short-term mortgages versus long-term mortgages. And so Canadians are going to be more affected and more immediately affected by rising interest rates. And so it’s one of the reasons why we think any Canadian slowdown might be a little bit worse that the U.S., though I should emphasize not worse than any slowdown that happens in Europe and in the UK.

And maybe a final thought on that front is just keep in mind, no one likes a recession if it happens. But this could well be a useful recession in the sense of significantly taming inflation, which is problem number one in the macroenvironment right now. And simultaneously, taming housing markets that had run away a little bit from—more than a little bit, perhaps—from fair value. And so there is value in getting some sort of economic reset. And so I think we do need to recognize that. And maybe most importantly, recessions are not forever. They’re brief events, and you go back onto a rising prosperity environment from there, and those generally dominate over the long run.

Okay. I’ll stop there and say thanks very much for your time. Hope you found this interesting, and please tune in again next time. Thanks so much.