We are only two weeks into the start of the new year and the markets are once again deeply unsettled by a host of factors, including the continued fall in energy prices (now 17% lower already this year), a renewed loss of confidence in the emerging markets and China in particular, the impact of a stronger dollar, heightened geopolitical risks, the ability of the U.S. consumer to once again act as the ballast to keep the global economy on an even keel, and exactly how much of a drag all of this will be on corporate profits. The 6% fall in the S&P 500 year-to-date against the drop in 10-year T-Note yields to 2.08% from 2.27% at year-start clearly tells us the investors are not prepared to take many chances. Certainly if the month continues like this (and we are only halfway through it), given the January effect, investors might be forgiven for feeling as though they should just pack up now and head out to the Oregon Hills, shotguns in hand. In this week's Economics Weekly, we look at one other possible threat, that of deflation, which the further strength in the dollar and continued declines in commodity prices and asset prices are causing us to once again think about.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.