Take Five: The heat is on

World markets are bracing for another summer, despite escalating tensions in the Gulf region and an assortment of potential risk factors for investors. Among these, the U.S. consumer health, inflation trends, and global food prices have taken center stage. A powerful El Niño, soaring energy costs, and fertiliser shortages due to the Middle East conflict, combined with disruptions in grain shipments from Ukraine, have raised concerns about a resurgence of food inflation.

The most significant impact is anticipated in Asia and Latin America, where food expenditure is higher for households, and policymakers remain vigilant against renewed price pressures.

India is already experiencing the effects of this food inflation. The United Nations Food and Agriculture Organization has warned that the world is on the brink of another wave of food inflation, with JPMorgan forecasting a 0.7% increase in global food inflation due to a strong El Niño. Market participants are closely monitoring the situation to determine whether it is a temporary issue or a new inflation challenge, potentially prompting central banks to reconsider their monetary policies.

In the coming week, retail earnings from companies like Walmart, Home Depot, Target, Lowe’s, and Deere will shed light on the health of the U.S. consumer. These earnings will indicate whether spending remains resilient across income groups and whether the Iran conflict is starting to affect household budgets. High gas prices (over $4 a gallon) and inflation in other areas suggest cooling inflation elsewhere.

Walmart and Target may provide insights into whether households are reallocating spending towards essentials as fuel and transportation costs soar. Home Depot and Lowe’s could reveal whether inflation and borrowing costs are discouraging home-improvement spending, while Deere may signal the impact of rising energy and input costs on farmers.

Gross Domestic Product (GDP) print from Japan will offer a glimpse into how the second-largest economy is coping with the Iran war and the Bank of Japan's decision to raise interest rates. The GDP is projected to have grown at an annualized rate of 2% in the quarter ending June, marking a third consecutive quarterly increase. Japan's ongoing concerns related to the lengthy Middle East crisis, which have led to higher costs for imported oil and a weaker currency, have amplified its inflation worries.

Consequently, the chances of a 25 basis point interest rate increase to 1.25% next month by the Bank of Japan appear more likely as the economy contends with mounting pressures to curb inflation and safeguard the yen.

The price of gold has fallen significantly since the start of the conflict, sitting near record highs at the beginning of the year. However, from its six-month low around $3,965, gold has surged nearly 10%. This resurgence is partly due to inflation not spiraling out of control and the possibility of the Federal Reserve not raising rates.

Investors are beginning to allocate capital back into gold. In the last quarter, gold ETFs experienced outflows, but they are now attracting inflows. Moreover, central banks, which had decreased their gold purchases in the first quarter, have bought more gold between April and June than in any other second quarter on record, totaling 289 metric tons according to the World Gold Council.