Global growth won’t resume until the recent spikes in prices and the rises in interest rates being used to combat them have reached their zenith, he says. Both would then start to weaken the US dollar, whose strength has increased the cost of foreign trade and pressurized emerging market economies.
Just like the famous UK Three Peaks Challenge in which runners must reach the summits of the highest mountains in Scotland, England and Wales within a set time, all three economic peaks must be overcome in the second half of 2022 so that markets can stabilize, Graham says.
The Three Peaks Challenge, No. 1: Inflation
The first peak to conquer is inflation, which has spiked on huge rises in energy and food prices following the end of the Covid-19 pandemic and the effects of the Russia-Ukraine conflict. Inflation has reached 8.6% in the US, its highest level since 1981, and 8.1% in the Eurozone, its highest level ever. Prior to the pandemic, inflation was consistently at or below 2% for many years.
“Inflation has been a benign indicator for investors for over four decades, ever since Paul Volcker, the then chair of the US Federal Reserve, tamed rampant US inflation of 20% and re-established central bank credibility in the early 1980s,” says Graham, Head of Multi-Asset Strategies at Robeco.
“We know that central banks have the tools to control inflation by raising interest rates, which reduces credit creation (the end of free money) and slows the housing market (the end of the cashpoint remortgage), which combine to reduce aggregate demand and increase unemployment.”
“Such a slowdown of the economy will be instrumental in reaching peak inflation, though we acknowledge that the blunt tool of interest rates will leave investors swinging wildly between fearing too much tightening in case it causes a recession, and not enough. So, there is more to come.”
US inflation is reaching levels not seen since 1981, even when the costs of energy and food are stripped out
Source: Bloomberg
While the main focus on inflation is higher prices in the shops, it is bad for both the equities and fixed income markets. Inflation eats into corporate profits if prices cannot be passed on, and it also reduces the values of longer-term bonds.
“The rise in energy prices permeates the whole economy, affecting business and consumers alike, acting a tax on growth and reducing demand for services and other goods,” Graham says. “In addition, the increased uncertainty about corporate earnings and the ability of companies to protect margins by passing on rising input costs (including labor and debt costs) will add to equity and high yield volatility.”
“The Fed’s broadening focus from using only Core PCE (excluding energy and food) as its preferred measure to tackle headline inflation means there is hope that peak inflation is on its way in the third quarter of 2022.”
The Three Peaks Challenge, No. 2: US rates
The next mountain to climb is interest rates, which have been raised across the world to combat inflation. Raising rates makes borrowing more expensive, leaving consumers with less money to spend. But it has side effects, including raising the value of an already expensive US dollar.
“The US Fed funds rate is projected to be around 3.5%, up from 1.75% at the end of June, which would be the largest rate rise in a calendar year since 1980,” says Graham. “In 1994, which saw what is generally considered to be an engineered ‘soft landing’, US rates jumped to 2.5%. So, the tightening cycle today is harder, because the economy needs that reaction function.”
“In our view, peaks in the various inflation data will point to lower inflationary pressures and signal that rate rises are working through the economy. In the second half, we expect a more benign outlook for financial conditions: we believe that rate expectations will drop, and the Fed Funds target rate will not reach 3.75% as is implied by the market by the year end.”
“All things being equal, this market consensus would imply an inverted yield curve, with recession indicators becoming more aligned and conclusive. Our core scenario is that we don’t expect a US recession in the next 12 months, although China, Japan and Europe may suffer that fate.”
免責聲明
本文由荷宝海外投资基金管理(上海)有限公司(“荷宝上海”)编制, 本文内容仅供参考, 并不构成荷宝上海对任何人的购买或出售任何产品的建议、专业意见、要约、招揽或邀请。本文不应被视为对购买或出售任何投资产品的推荐或采用任何投资策略的建议。本文中的任何内容不得被视为有关法律、税务或投资方面的咨询, 也不表示任何投资或策略适合您的个人情况, 或以其他方式构成对您个人的推荐。 本文中所包含的信息和/或分析系根据荷宝上海所认为的可信渠道而获得的信息准备而成。荷宝上海不就其准确性、正确性、实用性或完整性作出任何陈述, 也不对因使用本文中的信息和/或分析而造成的损失承担任何责任。荷宝上海或其他任何关联机构及其董事、高级管理人员、员工均不对任何人因其依据本文所含信息而造成的任何直接或间接的损失或损害或任何其他后果承担责任或义务。 本文包含一些有关于未来业务、目标、管理纪律或其他方面的前瞻性陈述与预测, 这些陈述含有假设、风险和不确定性, 且是建立在截止到本文编写之日已有的信息之上。基于此, 我们不能保证这些前瞻性情况都会发生, 实际情况可能会与本文中的陈述具有一定的差别。我们不能保证本文中的统计信息在任何特定条件下都是准确、适当和完整的, 亦不能保证这些统计信息以及据以得出这些信息的假设能够反映荷宝上海可能遇到的市场条件或未来表现。本文中的信息是基于当前的市场情况, 这很有可能因随后的市场事件或其他原因而发生变化, 本文内容可能因此未反映最新情况,荷宝上海不负责更新本文, 或对本文中不准确或遗漏之信息进行纠正。