Dear Investors,
PIMCO Asset Management – Global Economy and Markets over the next five years?
Secular horizon
“The global economy is exiting a period of massive fiscal and monetary policy interventions that are unlikely to be repeated over our secular horizon.”
“After the post-pandemic surge in global inflation, central bankers are starting to recognize that unconventional monetary policies bear costs as well as deliver benefits.”
“Surging sovereign debt levels will likely limit fiscal capacity to address future downturns.”
Inflation targets
“We expect central banks to maintain their existing inflation targets and to prioritize keeping longer-term inflation expectations anchored at those target levels.”
“We believe that neutral long-run real policy rates in advanced economies will remain anchored in a range of 0% to 1%.”
“With rising government debt and the possible return of an inflation risk premium, we expect the yield curve to steepen.”
“And investors demand more compensation on longer-term bonds over the secular horizon.”
The dollar dominant
“A new era of geopolitical tension between an established superpower and a rising rival will likely create global economic implications.”
“We continue to believe that the U.S. dollar will retain its status as the dominant global currency, despite a widening U.S. fiscal gap and growing indebtedness.”
“The dollar could see its use in international trade continue to erode, albeit slowly, as the world trading system fragments further into competing regional blocs.”
“This could signal a decline in American exceptionalism, and potentially a sustained period when non-U.S. investments outperform.”
IN MAY 2022, IF YOU HAD BEEN WATCHING MARKET FOR:
- 13years: The MOVE Index of bond market volatility at 180
- 15years: A Federal Funds Rate north of 5%
- 34years: Double-digit average inflation across OECD countries
- 42years: 475 bps of FED hikes in 12 months
“These events will likely reverberate for years to come.
“We expect more frequent and more volatile business cycles, with less scope for governments to deploy countercyclical fiscal policy.
“Central banks less willing to double down on administering unlimited doses of quantitative easing (QE).”
RBC Global Asset Management – Global with China Update
“Markets are now discounting an 80% probability of one further hike at either the July Federal Open Market Committee (FOMC) meeting.”
“We continue to hear policymakers emphasizing concern that inflation remains materially too high.”
“A creeping de-globalisation is likely to remain a structural headwind for Chinese activity, as companies in North America and Europe slowly draw back from the country.”
US yields
“US yields have continued to push higher during the past week. Although the unemployment rate ticked up to 3.7%, the headline figure of 339,000 new jobs in May highlights ongoing strength in labour demand.”
US debt issuance
“Another factor generating an amount of discussion has been how US debt issuance is set to accelerate now that the debt ceiling has cleared.”
“Much of this additional supply will be in Treasury Bills, yet this will nonetheless act as a net drain on liquidity.”
China update
“Soft economic data has led to speculation of further stimulus measures in China. We think that some additional easing is likely, but any measures announced may remain relatively limited in scope.”
“In a sense, prior policies which have served solely to stimulate short-term demand and growth in asset prices seem to have been eschewed.”
“Instead, we see Beijing continue to focus on structural reform of the economy, with a long-term strategy to gain ground in the ‘commanding heights’ of the economy, in the decades to come.”
“The longer-term benefits of such policies remain uncertain, though in the short term, it is likely the case that, as with all structural reform, this will infer a relative drag on near-term growth.”