This may appear an odd question to ask given the recent slew of poor inflation data points that have been released but we suspect that “all is not quite as it seems” within bond markets, or even the global economy. First, the inflation story.
Major “events” in markets have been caused by wrong assumptions over mathematical relationships. The Long Term Capital Management Debacle (LTCMD) in 1998 was primarily the result of the incorrect assumption of perfect markets by a cluster of Nobel Laureates. The naïve and wrong assumptions over correlations proved to be the spectacular undoing of the mortgage markets in 2007-8.
Currently, the US economy is stuttering. Headline growth during the latter half of 2023 was extremely rapid – GDP growth averaged more than twice the economy’s 20-year average - but this strong activity was led by the public sector, either directly through government investment or indirectly via the authorities’ support for household incomes.
The US economy continues to look robust, so we have stayed constructive on growth assets and short maturity global credit where yields are attractive. We still believe that the path to 2% inflation in the US is relatively unclear. If anything, our conviction on this point has increased because easier financial conditions may ultimately pave the way for the return of sticky inflation.
We expect macro and corporate credit fundamentals across Asia ex-China to stay resilient due to fiscal buffers although slower economic growth seems to loom over the horizon.
This month we discuss why the equity market is relatively unaffected by the political scandal shaking Japan’s ruling party; we also assess how 2024 could become an inflection point in the country’s “savings to investments” drive.
The peaking of interest rates and potentially the US dollar could be a boon for broader markets—particularly those more sensitive to liquidity, countries with more room to ease rates and areas where positive fundamental changes have been overlooked. China’s economy is undergoing a major transition into one that promotes advanced manufacturing, technology, self-sufficiency and higher-end overseas growth. These are areas of our focus.