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Kerry Craig
Kerry Craig
Kerry Craig is a global market strategist at JP Morgan Asset Management.

The many moving parts of the inflation outlook, including housing and wages, make it difficult to determine the exact path for policy interest rates. The easing of price rises in recent months reduces the risk central banks will overcommit to fighting inflation, but that is not the same as cutting rates.

Rising interest rates, a strong US dollar, an energy crisis and the pandemic combined to create stiff headwinds for Asian economies this year. However, if the US dollar stops rising, the Federal Reserve pauses interest rate increases and China reopens, Asia could be poised for a better 2023.

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Investors are looking for the US stock market trough and starting to wonder if it has already passed, but multiple bear market rallies are not uncommon. The sooner uncertainty over market risk clears up and a full recession is either priced in or not, the sooner equity markets can start to recover.

While other sectors appear to be cooling off, the US labour market is showing resilience amid rising wages and a shrinking pool of workers. Any slowing in the pace or magnitude of the Fed’s rate increases will be closely linked to the performance of the labour market.

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US stocks have made back much of their losses from the first half of the year, and there are signs the rally in equity markets still has some way to go.

Much has changed since 2013, when emerging markets were badly hit by US monetary tightening. Today, central banks in developing nations have been quick to confront inflation and post-pandemic demand, and with smaller deficits than a decade ago, there is less chance of panic selling of currencies.

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While the shift from quantitative easing to tightening has happened very quietly, the path for running down the balance sheet was well telegraphed by the US central bank. This is in sharp contrast to the rhetoric from several Fed officials on interest rates.

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Falling consumer confidence and stock sell-offs have sparked concern about a growth slowdown in the US, which given its economic size could drag down the rest of the world too. However, a US downturn is not inevitable, especially given the healthy labour market.

Hawkish central banks and the possibility of extended lockdowns in Chinese cities have adversely affected sentiment. The rise in Treasury yield, the yen’s depreciation and the erosion of gold’s value by inflation means investors need to consider their options carefully.

Unlike bonds in the US and other advanced economies battling sky-high inflation, emerging market bonds can offer positive real income. Still, high food and energy prices mean investors must be selective; exporters of commodities are better-positioned than manufacturing countries reliant on goods from elsewhere.

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Investors are worried the policy support freely offered by central banks in the past two years will be withdrawn quickly and aggressively. Market volatility is expected to persist until there is greater clarity about the pandemic, snarled supply chains and interest rates.

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This year may well see not only the end of bond purchases by the Fed and the start of the rate hike cycle, but also the first steps in reducing its swollen balance sheet. The highly valued parts of the market, such as growth stocks and tech stocks, will come under pressure.

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Amid a warming US economy and growing inflation, Fed hawks will push for rate rises to start as soon as mid-2022 at the next key meeting. But how much the Fed allows tapering to quicken will depend on Omicron risks

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Despite warnings about rising inflation amid supply-chain disruptions and tight labour markets, the gold price has remained steady. Gold is likely to lose its appeal as inflation pressures ease and central banks shift away from emergency policy settings.

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The key is the speed at which monetary and fiscal policy is tightened and how fast wage growth rises. Supply and demand imbalances will resolve but pressures from the labour market shortage and continued fiscal spending will linger.

The potential for a slowdown in the world’s two largest economies is feeding concerns about a peaking in global growth. Both countries are also facing another wave of Covid-19 cases. The Delta variant is the biggest risk when it comes to the outlook for any economy.

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Part of the reason could be worries about what lies ahead, in particular the spread of the Covid-19 Delta variant. The dampeners on government bond yields will fade over time, and the prospects for brighter economic growth should send yields higher.

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Falling yields might be a sign that messages around the transitory nature of inflation are starting to sink in. The onus is on the US Federal Reserve to justify its accommodative stance and lean into its guidance that it will tolerate higher inflation before raising rates.

Funding stimulus measures through higher corporate and personal taxes may hit US equities. While technology, communication services and health care sectors may be adversely affected, industrial, energy and materials sectors stand to gain.

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Investors expecting the currency to fade have been flummoxed by a reinvigorated US economy. Renewed dollar depreciation will come, though, as the sugar rush of stimulus fades and other countries’ vaccine programmes catch up.

Investors will be weighing how credible the Fed’s outlook is for a US economy supercharged by a massive stimulus boost that may cause inflation to spike, forcing an early move on either bond purchases or the rate outlook.

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Solid support will come from US earnings, the global vaccine roll-out and accommodative policies, with non-US markets performing better. Risks lie in the ability of companies to control costs as the economy improves, and taxes and wages rise.

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True, an inflation spike and sharply higher bond yields would derail markets. But this is unlikely given the slack in the economy and central bankers’ reluctance to unwind easy policy.

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The sheer volume of debt going bad, particularly involving state-owned enterprises, signals the government is taking a more market-based approach, which will improve transparency in the worlds second-largest bond market.

The ultra-low interest rates adopted to fight off global economic malaise have made government paper in developed markets less attractive. Corporate credit and emerging market debt will have to be part of the playbook.

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The People’s Bank of China has similar tools as other central banks but chose to use them more delicately than the sledgehammer approach of its peers. The relatively conservative nature of its support has increased the attractiveness of Chinese government bonds by creating a healthy spread over developed bonds.

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Actual earning results have been better than forecast, and that’s good enough for the US stock market. Despite the positive trend, however, the outlook for sectors that rely on the physical presence of people for profits remains bleak.

Governments and central banks’ commitment to nurse the global economy back to health is reassuring, but the virus won’t be so quickly tamed. Sectors which can operate with social distancing policies are likely to do better than industries heavily reliant on the free flow of people.

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European equity indices have not bounced back in the same way as their US counterparts, indicating there is room for gains, especially as European officials have taken strong measures to boost recovery.

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The recent rebound in equities has been prompted by aggressive fiscal and monetary stimulus from central banks and governments, and a belief that the worst of the pandemic has passed. A deterioration in corporate earnings could stymie this trend.

When the oil price war began, no one had accounted for the economic damage that would be caused by Covid-19, or how demand for oil would evaporate. The reality is that oil under US$30 per barrel is not sustainable for either country.

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The low interest rates and bond-buying schemes of central banks are pushing up prices, creating what some fear to be the mother of all bubbles in the bond markets. But with no sign of investor speculation, gradually falling bond yields may actually be due to a structural market change.

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The US and China have reached a partial trade deal, amid forecasts for higher global economic growth in 2020. In addition, central banks like the Fed are not only keeping policy loose but also showing greater tolerance towards inflation.

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Easing of the trade war tensions and some clarity on Brexit have lifted markets after a year of uncertainty. Details on both are still to be hammered out, however, so investors should be cautious.

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Market optimism stems from anticipation of a US-China trade war deal and signs that sentiment in the manufacturing sector is slowly improving. However, as investors turn to riskier assets, they must also build protection against downside risk into their portfolios.

Receding political risks look likely to keep market spirits up for the rest of 2019 but be warned: global growth continues to slow and corporate investment remains weak while the props for growth – reforms, tax cuts, fiscal spending – look shaky.

The recent ‘pipe blockage’ in the US financial system caused fears of a much bigger problem with the Fed’s balance sheet. But, sometimes supply and demand don’t match and, on this occasion, the mismatch was simply greater than expected and was fixed.

Historically, a yield curve inversion precedes a recession. However, following an era of easy money, an inversion might simply signal that markets are expecting loose monetary policy again.

Companies typically set themselves up to beat expectations in corporate earnings reports. So while they generally maintain profit margins, it is telling that fewer corporations are exceeding their targets.

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The expectation of a rate cut has given US stocks a lift this month, but monetary easing by itself won’t outweigh the more important indicators of economic health, like earnings growth, particularly amid the current political and trade uncertainties.

The trade war is hitting manufacturing activity, particularly in South Korea, Taiwan, Japan and Germany, but the services sector, which holds the key to employment and consumption, remains resilient. However, things could change if uncertainties drag on.

The US economy started the year with a bang but growth is likely to flatten out over the year. Meanwhile, Asia is looking up as a US-China trade deal appears imminent. 2018’s economic divergence is unlikely to continue.

Economies around the world – including the US and China – will see growth stabilise, not pick up or drop significantly. Meanwhile, company earnings will have to bottom out or even rise to calm investor nerves.

The US Federal Reserve’s latest shift, to take a pause during a tightening cycle is relatively rare. But Fed chair Jerome Powell seems to have abandoned a previous policy of giving clear signals to the market.

While there is uncertainty over US monetary tightening, the trade war, Chinese economic policy and global politics, the short-term volatility of the past few weeks may be fading.

With the markets jumping at every Fed statement, anxiety is growing over the Treasury yield curve flattening or, worse, inverting. A closer look shows the Fed is closely watching evolving economic data and its policy will remain accommodative.

While bond markets are experiencing a complicated period, it’s not yet time to ditch corporate debt, including high-yield bonds, in favour of safer government securities.

While a down cycle will inevitably follow America’s currently buoyant growth, a catastrophic downturn like the 2008 global financial crisis is unlikely. Debt levels are more manageable, and the imbalances in the economy less severe.