Every quarter, our GFICC senior investors gather to formulate a consensus view on the near-term fixed income markets. The result of this is a strategy roadmap for the coming three to six months.
- Above Trend Growth continues to be our base case for 3Q 2021, the likelihood of which, in our current view, remains 90%1 . Central banks remain committed to over-accommodation, and the prospect of more fiscal stimulus out of the US will only intensify the reopening of the economy. Government, business and household balance sheets have all been refreshed with initiatives including low-cost borrowing and fiscal transfers.
- The probability of Sub Trend Growth remains 0%1 as policymakers remain committed to letting economies run hot.
- We believe the likelihood of a Recession and Crisis remains 5%1, respectively. There is still some non-zero probability that inflationary pressures may build to a point that provokes an aggressive monetary response, throwing the global economy into recession as liquidity is aggressively drained from the system. And virus variants remain an ever-present threat that could trigger another global lockdown and crisis. But these each appear to be small tail risks.
GFICC Scenario Probabilities and Investment Expectations: 3Q 20214
4. Source: J.P. Morgan Asset Management’s GFICC Investment Quarterly (IQ). As of 09.06.2021. Opinions, estimates, forecasts, projections and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. There can be no guarantee they will be met. Above-trend: Global gross domestic product (GDP) growth >3.5%, inflation >2%; Sub-trend: Global GDP growth 2-3.5%, inflation 0-2%; Recession: Global GDP growth <2%, inflation <0%; Crisis: A disorderly movement in markets causes systemic impact and tail risk. Provided for information only and not to be construed as investment recommendation or advice. Forecasts and estimates are indicative, may or may not come to pass.
Inflation becomes a complex and tangled web of considerations
- Supply constraints (global manufacturing, select labour markets) may weigh on growth and boost inflation for several quarters.
- The inflation story has become a complex than simply a view on whether it is transitory. Instead, it is a tangled web of considerations about whether we are seeing the beginning of a new, reflationary era or are destined to return to secular stagnation.
- The structural factors supporting secular stagnation are being challenged at a time when Modern Monetary Theory has emerged as both an accepted and an effective tool for policymakers. The era of structurally low inflation may have passed.
Inflation expectations: beginning to pick up5
5. Source: J.P. Morgan Asset Management Quantitative Research Group. As of 15.05.2021. DM: developed markets. Opinions, estimates, forecasts, projections and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. There can be no guarantee they will be met.