Skip to main content

It’s just a phase: Three-minute macro

Inflation is top of mind and with good cause: It’ll be tough to call as it likely will go through ups and downs over the next few years. Meanwhile, the U.S. Federal Reserve’s language has market participants on their toes, while Asian exports should heavily affect the economy in the region.

The inflation roller coaster

In June, we released a broad inflation outlook, and while that work has given us a robust framework from which to look at inflation, sometimes there’s value in a simpler approach. For this reason, we’ve developed a three-phase inflation framework. This framework underscores two core messages that we feel are paramount.  

First, it’s incredibly important that either inflation or disinflation arguments are applied to the correct timeline. For example, supply chain disruptions are near-term factors, while infrastructure is a long-term inflationary pressure.

Second, inflation is likely to be a roller-coaster ride in the next 18 months and we believe it’ll come in three phases. First, we expect a period—likely lasting through September—of sticky high prices, during which we expect to see a 3% to 4% inflation rate. Next, we’ll likely see a cooldown period, during which inflation worries temper, backing off to approximately 2% running into 2022. Lastly, in the post-COVID-19 (hopefully) world of 2023 and beyond, we expect slightly higher inflation as new factors such as deglobalization, monetary and fiscal policy adjustments, and the lagged effects of higher shelter costs work through.

Getting the inflation (and rates) call right means navigating these ups and downs as opposed to simply picking an inflation or disinflation side. 

Three phase inflation framework

Chart showing the three inflation phases in our framework. The Overheat has inflation at 3-4% until September, the Reprieve has it at 2% through 2022 while New Inflation around 2.5% begins in 2023.
Source: Manulife Investment Management, as of July 7, 2021. 

FOMC damage is done

While U.S. Federal Reserve (Fed) policymakers have spent much of the last few weeks walking back their communication on conventional (interest rate) policy normalization at their June meeting, certain markets remain shell shocked. The USD remains higher, yields (at least beyond the very front end) are lower, and curves are flatter. These moves suggest that market participants may be reassessing the Fed’s reaction function, despite last year’s introduction of flexible average inflation targeting (FAIT) that followed the prior optimal control framework championed by (then-Vice Chair) Janet Yellen in 2012.

Despite its successful introduction at the 2020 Jackson Hole symposium, the Fed has struggled to properly communicate the parameters under which it would implement FAIT. Indeed, the June 2021 Fed meeting appeared to even dismiss the optimal control framework as the Summary of Economic Projections “dots” revealed a preference for higher and sooner rather than lower for longer; sooner hikes appear to imply a lower end point.

The policy uncertainty introduced by the Fed’s communication is worrisome as it implies a shift back toward traditional economic orthodoxy following 10+ years of post-global financial crisis evolution. The shift back toward orthodoxy itself is also worrisome, given that the Fed’s latest interventions reached a greater number of asset classes, most notably corporate credit.

Eurodollar curve, pre- and post-June FOMC meeting

Chart showing the Eurodollar curve pre- and post-June FOMC meeting. Following the meeting, the long end (December 2026) is much higher than it was pre-meeting.
Source: Manulife Investment Management, Macrobond Financial AB, Bloomberg, as of July 7, 2021.

Asian risks rise as the West reopens

While Asia was well placed last year to take advantage of the disruption in global supply chains and the surge in pandemic-related goods demand (electronics, personal protective equipment, toys, and furniture, etc.), its economy now faces a moment of truth as the West begins to reopen. Over the next few months, rising competition from increased global supply and decreased demand from the normalization in global consumption patterns will mean moderation in a key pillar of growth.

Looking at the May trade figures of China, India, Indonesia, Singapore, South Korea, and Taiwan, sequential export growth momentum has slowed drastically, from 18.60% month over month in March and 3.50% month over month in April to 0.55% in May. This is consistent with the decline in manufacturing PMIs in May from 53.3 to 52.3 (unweighted average basis).

Since manufacturing exports have been a major pillar of growth for the region, and since performance of Asian financial assets is closely tied to the export outlook, we’ll be monitoring this in case of a more sustained downtrend. 

The performance of Asian financial markets is tied to the regional export outlook

% change year over year

Line chart showing the Year-over-year performance of Asian currencies, exports and equities. Asian currencies and equities have turned over significantly since March. 2021.
Source: Manulife Investment Management, MSCI, Macrobond Financial AB, as of July 7, 2021. Asian currencies is a simple average of IDR, MYR, PHP, SGD, KRW, TWD and THB spot rates per USD. Emerging Asian Equities are represented by the MSCI EM Asia IMI Index, Total Return in USD. 

A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future, could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other pre-existing political, social and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment.

Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments.  These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments.

The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.

This material is intended for the exclusive use of recipients in jurisdictions who are allowed to receive the material under their applicable law. The opinions expressed are those of the author(s) and are subject to change without notice. Our investment teams may hold different views and make different investment decisions. These opinions may not necessarily reflect the views of Manulife Investment Management or its affiliates. The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.

Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained here.  All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment or legal advice.  This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment strategy, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit or protect against the risk of loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management. Past performance does not guarantee future results.

Manulife Investment Management

Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation. We draw on more than a century of financial stewardship to partner with clients across our institutional, retail, and retirement businesses globally. Our specialist approach to money management includes the highly differentiated strategies of our fixed-income, specialized equity, multi-asset solutions, and private markets teams—along with access to specialized, unaffiliated asset managers from around the world through our multimanager model.

This material has not been reviewed by, is not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions. Additional information about Manulife Investment Management may be found at manulifeim.com/institutional

Australia: Hancock Natural Resource Group Australasia Pty Limited., Manulife Investment Management (Hong Kong) Limited. Brazil: Hancock Asset Management Brasil Ltda. Canada: Manulife Investment Management Limited, Manulife Investment Management Distributors Inc., Manulife Investment Management (North America) Limited, Manulife Investment Management Private Markets (Canada) Corp. China: Manulife Overseas Investment Fund Management (Shanghai) Limited Company. European Economic Area Manulife Investment Management (Ireland) Ltd. which is authorised and regulated by the Central Bank of Ireland Hong Kong: Manulife Investment Management (Hong Kong) Limited. Indonesia: PT Manulife Aset Manajemen Indonesia. Japan: Manulife Investment Management (Japan) Limited. Malaysia: Manulife Investment Management (M) Berhad  200801033087 (834424-U) Philippines: Manulife Asset Management and Trust Corporation. Singapore: Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration No. 200709952G) South Korea: Manulife Investment Management (Hong Kong) Limited. Switzerland: Manulife IM (Switzerland) LLC. Taiwan: Manulife Investment Management (Taiwan) Co. Ltd. United Kingdom: Manulife Investment Management (Europe) Ltd. which is authorised and regulated by the Financial Conduct Authority United States: John Hancock Investment Management LLC, Manulife Investment Management (US) LLC, Manulife Investment Management Private Markets (US) LLC and Hancock Natural Resource Group, Inc. Vietnam: Manulife Investment Fund Management (Vietnam) Company Limited.

Manulife, Manulife Investment Management, Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.

PPM 539251

Frances Donald

Frances Donald, 

Global Chief Economist and Strategist, Multi-Asset Solutions Team

Manulife Investment Management

Read bio
Erica Camilleri, CFA

Erica Camilleri, CFA, 

Senior Global Macro Analyst, Multi-Asset Solutions Team

Manulife Investment Management

Read bio

Category

Tags