Is Global Reflation Back?
A woman walks in front of the London Stock Exchange. REUTERS file photo
Despite the recent geopolitical tensions between North Korea and the United States, economic indicators show that the global economy has been chugging along. The European Purchasing Managers’ Index (PMI) has risen to its highest level in more than six years while Japan’s PMI registered its second consecutive month of recovery. In the US, most regional Federal Reserve (Fed) business sentiment surveys show a pick-up in economic momentum from the summer lull.
This week, we expect the positive news flow to continue, starting with the US Institute of Supply Management’s Manufacturing PMI later today. The index rose to a six-year high of 58.8 in August and analysts expect the barometer to dip marginally to 57.5 for September. A PMI reading of 50 and above denotes growth in the manufacturing sector and signals a stronger economy.
The other US economic indicator that will be closely watched is the non-farm payroll number due on October 6. This, together with US unemployment rate and average hourly earnings growth, will give us a reading on the state of the labour market in the world’s largest economy and signal if wage growth will translate to rising inflation.
In Singapore, we are also expecting our own manufacturing PMI later today, after the reading rose to a two-year high in August. The better-than-expected August non-oil domestic export data reported recently has raised expectations for the robust economic momentum to continue into the fourth quarter. A continued rise in the PMI would affirm the trend.
The Fed has indicated that it believes the current low inflation is transitory and is prepared to reverse quantitative easing by selling its bond holdings. There is also a possibility that the Fed will raise interest rates again in December. This suggests that it believes in a reflation trend, not only in the US but also in the major economies.
If true, this should spell higher interest rates ahead, and imply an ‘overweight equities and underweight bonds’ positioning for investors. As a matter of fact, the 10-year US Treasury yield has begun to creep higher in the past weeks. However, mindful of the geopolitical uncertainty on the Korean peninsula, we continue to advocate a neutral position for both asset classes for now.
ABOUT THE AUTHOR: Dharmo Soejanto is Director, Multi-Asset Strategy at UOB Asset Management
