Weighing in on yesterday’s move in a fresh note, Edwards predicts China’s actions will release a tidal wave of deflation in the West. “Make no mistake, this is the start of something big, something ugly,” he says. And while western nations have been sighing with relief over abating deflation pressures, Asia has presented a “puss-filled boil” that needs to be lanced, he warns.
“We have long believed that we are only one misstep from outright deflation in the West, with core inflation in both the U.S. and the eurozone at just 1%. We expect the acceleration of EM devaluations to send waves of deflation to the West to overwhelm already struggling corporate profitability and take us back into outright recession,” Edwards says.
With that, he predicts “a financial market rout every bit as large as 2008,” along with sub-1% 10-year Treasury yields
TMUBMUSD10Y, -1.58% as core inflation drops below zero.