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 is still our base case for 4Q 2021, but reduced to an 80%1 probability in our current view, given central bank normalisation, the expiration of US unemployment benefits and the persistence of the global public health crisis. In our current view, the probability of Sub Trend Growth was raised to 10%1 from 0% because the growth peak has passed and downside risks have risen. We believe the likelihood of a Recession and Crisis remains 5%1, respectively.
- The reopening growth surge has appeared to peak, and there is some debate as to where US and global gross domestic product will settle. The Delta variant healthcare challenges have proven to be more material than originally hoped, while supply-side constraints are still evident and limiting growth. The US is about to transition away from enhanced unemployment benefits and China is tackling both mobility restrictions from its zero infection rate policy and the impact of increased regulation.
GFICC Scenario Probabilities and Investment Expectations: 4Q 20214
4. Source: J.P. Morgan Asset Management’s GFICC Investment Quarterly (IQ). As of 15.09.2021. 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.
How transitory is inflation and what does it mean for central banks?
- Though supply disruptions are pushing inflation higher for longer-than-expected, we expect them to fade gradually. More persistent inflationary pressures are building up in some economies (US and UK) while anecdotal evidence from companies suggests cost pressures have been passed through to the consumer, protecting corporate margins.
- The Federal Reserve (Fed) has already stated its intention to start tapering its large-scale asset purchases. Details are expected to be announced later this year. We believe the Fed is likely to wait for a few quarters before the first rate hike, in mid-2023. Importantly, the inflation trajectory over the next two years, and how far rates need to ultimately rise, may determine how disruptive this round of Fed monetary tightening will be.
- The Bank of England also looks set to end its quantitative easing programme by end-2021, with a first rate hike in 2Q 2022. The European Central Bank should end its Pandemic Emergency Purchase Programme (PEPP) in March 2022, but maintain market support through the general Asset Purchase Programme (APP), with no rate hikes on the horizon. Lastly, the Reserve Bank of Australia has indicated further taper in February 2022, with the bond-buying programme to end by 3Q 2022 and a first rate hike in 2024.
Interest rates and inflation5
5. Source: BLS, FactSet, Federal Reserve, J.P. Morgan Asset Management. Real 10-year Treasury yields are calculated as the daily Treasury yield less year-over-year core CPI inflation for that month except for September and August 2021 where real yields are calculated by subtracting out September 2021 year-over-year core inflation. Data are as of 30.09.2021.