Global Asset Allocation Viewpoints and Investment Environment by T. Rowe Price Australia Investment Committee, as at 30 September 2023.
MARKET PERSPECTIVE
- While global growth and inflation are expected to trend lower, much variation exists across regions and countries in terms of the level and pace of deceleration.
- U.S. and Japanese economies are proving more resilient, although the U.S. is seeing some evidence of a cooling consumer. While weakness is seen across Europe as they work through softer growth and elevated, albeit softening inflation, Chinese growth is mixed as recent slowing is being met with a broad range of incremental stimulus measures amid growing concerns surrounding its property sector.
- While global central bank tightening has likely peaked, the U.S. Fed’s pledge for “higher for longer” rates has had worldwide impacts on raising yield levels that could create vulnerabilities.
- Key risks to global markets include impacts of the sharp move higher in rates, a deeper than expected decline in growth, central bank missteps, reacceleration in inflation, trajectory of Chinese growth, and geopolitical tensions.
MARKET THEMES
Costly Capital
Longer-term global bond yields have gone nearly parabolic over recent weeks, led by U.S. yields, with the 10-year Treasury yield hovering near 4.8%, a 16-year high. The sharp move has been attributed to the Fed’s commitment to “higher for longer,” despite signs of slowing inflation in the pipeline. Further exacerbating the sharp move higher has been the recent rise in energy prices, impending U.S. Treasury supply on rising deficit spending, Fed’s quantitative tightening policy reducing its Treasury holdings and concerns over waning foreign demand for U.S. debt. The recent volatility in global yields has unsettled markets fearing the implications of much higher financing costs and what impact the growing losses have on current bond holders. Although higher rates may be warranted to a degree as markets adjust to a higher inflation regime ahead given trends away from deglobalization and aging populations, as well as the likelihood of higher deficits, it’s hard to believe that such an abrupt reset won’t end up being too costly for someone.
Also read: What’s Happening in the US Treasury Market?
Tapped Out
Although off recent highs, oil prices are still up more than 20% off their June lows as supply has tightened following the announcement of production cuts by OPEC+1 , rising demand expectations from China, and a depleted U.S. Strategic Petroleum Reserve (SPR). The almost year-long decline in oil prices since June of 2022 had played a large role in supporting the decline in inflation in the first half of this year, but the recent sharp rise is disrupting the deflation trend that markets had been hoped would move central banks to the sideline. While some of the rise can be explained by near-term supply/demand dynamics, the market has started to recognize that productivity gains over the recent decade contributing to lower energy prices appears to be past peak, leading to higher prices ahead. While a recession could curb demand and lead to lower energy prices over the short-term, the new reality that productivity gains may be tapped out, is yet another factor that could contribute to higher levels of inflation ahead.
PORTFOLIO POSITIONING
- While global growth and inflation are expected to trend lower, much variation exists across regions and countries in terms of the level and pace of deceleration.
- U.S. and Japanese economies are proving more resilient, although the U.S. is seeing some evidence of a cooling consumer. While weakness is seen across Europe as they work through softer growth and elevated, albeit softening inflation, Chinese growth is mixed as recent slowing is being met with a broad range of incremental stimulus measures amid growing concerns surrounding its property sector.
- While global central bank tightening has likely peaked, the U.S. Fed’s pledge for “higher for longer” rates has had worldwide impacts on raising yield levels that could create vulnerabilities.
- Key risks to global markets include impacts of the sharp move higher in rates, a deeper than expected decline in growth, central bank missteps, reacceleration in inflation, trajectory of Chinese growth, and geopolitical tensions.
Note: T. Rowe Price’s Australia Investment Committee comprises local and global investment professionals who apply views from the firm’s Global Asset Allocation Committee to make informed asset allocation views from an Australian investor perspective. The Committee is led by Thomas Poullaouec, Head of Multi-Asset Solutions APAC, based in Singapore.
