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Japan has experienced deflation for much of the past 30 years (Figure 1). That’s the general consensus, so why my titular question? Because what Japan has not had over the past three decades is the sort of broad wage-service deflation that is most feared by economists. Instead, I would characterise Japan’s deflation as having been mostly idiosyncratic in nature.

Figure 1

Is Japan's deflation cycle at the end?

Deflation was mostly idiosyncratic

Japan’s protracted battle with deflation was largely attributable to specific dynamics, including the country’s botched policy response to its 1980s asset-price bubble, whose collapse in 1991 ushered in Japan’s so-called “lost decade” — a period of economic stagnation that lasted until 2001. In addition, I believe the massive…

MACRO
THEMES
Paul Cavey
Paul Cavey
Macro Strategist
Hong Kong

With an unstable relationship between the US and China looking like a long-term geopolitical reality, pressure to relocate manufacturing away from China is growing. Could neighbouring India, which has a similar population size and rate of economic growth, be positioned to benefit from the shift?

I believe this is not a realistic expectation. Understanding why requires a quick recap of India’s industrial history.

Constructing — and dismantling — the socialist edifice

In the decades after India gained independence in 1947, while East Asia was opening up to the rest of the world, Indian manufacturing stagnated under a series of protectionist trade policies and a socialist industrial model that stifled competition, discouraged innovation and encouraged downsizing rather than expansion. Labour was protected to the point of dysfunction, while education and skills languished in the hands of a corrupt and inefficient bureaucracy. India’s location did not help — in a historically poor region far from key sea routes, with poor connections with the West and East Asia.

Reform came in the early 1990s when a spike in oil prices sparked by the Gulf War coincided with a trough in remittances from Indians in the Gulf. With FX reserves for imports and debt servicing running dangerously low, a desperate Indian government secured an emergency loan from the International Monetary Fund in 1991. In exchange, the government implemented sweeping reforms to open up the economy.

By the 1980s, India’s growth was accelerating fast. But it was arguably too…

MACRO
Tushar Poddar
Tushar Poddar
PhD
Macro Strategist
London

The short answer is not right now, but potentially down the road. And I believe it’s less about how high inflation can go than it is about the portfolio implications of even moderately higher global inflation, which investors haven’t experienced for most of the past 30 years.

It may seem odd to talk about inflation these days. However, the substantial level of coordination between monetary and fiscal policymaking following the COVID-19 shock, with many central banks providing ample space for fiscal stimuli by buying up newly issued debt, has led to inflation coming up in many discussions with clients lately. A string of recent data releases has also helped put inflation risk back on some clients’ radars.

Nonetheless, I think it’s fair to say that many clients remain to be convinced that inflation poses a real threat to their investment portfolios, particularly because…

MACRO
Nick Samouilhan
Nick Samouilhan
PhD, CFA
Multi-Asset Strategist
Singapore

I was strongly bullish on Russian equities for most of 2020, but have become decidedly more cautious on the market of late. Why? Potential controversy around the upcoming US election is one reason, but there’s more to the story.

First, the good news

I recently spoke with 16 Russian companies across the financial services, internet, telecom, retail, steel, and oil & gas industries. The good news is that Russia’s economic activity is rebounding, while both corporate and consumer sentiment are inching higher. In addition, the risk of a second COVID-19 wave hitting Russia appears to be relatively low as of this writing. Here’s a cross-section of the sanguine comments I’ve heard from company executives lately…

2020 US ELECTION
MACRO
Jamie Rice
Jamie Rice
CFA
Equity Portfolio Manager
Boston

The upcoming US election is arguably the biggest near-term risk facing global markets right now. Questions continue to swirl around both the election process and the potential outcome, not to mention the looming specter of post-election controversy if it appears that President Trump has lost. The large number of mail-in ballots could mean delayed results and legal challenges, perhaps even civil unrest.

In addition, risk markets would be inclined to initially react poorly to a “blue-wave” scenario where Democrats win the White House and control both houses of Congress, which would likely pave the way for higher corporate taxes and increased government regulation. As of this writing, that looks to be a…

2020 US ELECTION
MACRO
Nanette Abuhoff Jacobson
Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist
Boston

Baseball legend Yogi Berra famously remarked that “it’s tough to make predictions, especially about the future.” Political elections are no exception, of course. But as difficult as forecasting an election can be, predicting market reactions is arguably even more challenging. That being said, with the 2020 US elections only a few weeks away, now seems an opportune time to think through the various potential outcomes and their implications for fixed income and currency markets.

While most market participants are focused on the presidential election, which party controls the Senate is of equal importance in the event of a Biden victory; it matters less under a Trump presidency given that Democrats control the House of Representatives, with little chance of a flip there. Thus, the three possible outcomes to consider are…

2020 US ELECTION
MACRO
Brij Khurana
Brij Khurana
Fixed Income Portfolio Manager
Boston
Joe Marvan
Joseph Marvan
Fixed Income Portfolio Manager
Boston

I think the US Federal Reserve (Fed)’s newly unveiled framework for its long-run goals and monetary policy strategy, combined with its recent statements, signals a fundamental change in how the central bank will conduct monetary policy from here on.

Prior to the 2008 financial crisis, the Fed would tend to hike interest rates when the unemployment rate fell below NAIRU.1 The Fed’s latest statement made clear that this is no longer a sufficient reason to raise rates, unless accompanied by inflation exceeding its target in order to deliver a 2% average inflation rate.

A closer look at the new framework

In general, the communique was dovish in that the Fed is basically saying that it will need to see both low unemployment and above-target inflation before it will consider hiking rates. The Fed’s policy rate is likely going to be…

MACRO
Brij Khurana
Brij Khurana
Fixed Income Portfolio Manager
Boston

COVID-19 impact on global supply chains

Localization. Digitization. Industrial protectionism. In the wake of COVID-19, the world is eager to form more resilient supply chains. These efforts could affect a range of industries as well as fiscal and monetary policy. In this 17-minute audiocast, Geopolitical Strategist Thomas Mucha speaks with members of our Global Macro Team about the future of global supply chains.

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CORONAVIRUS
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Juhi Dhawan headshot
Juhi Dhawan
PhD
Macro Strategist
Boston
Jens Larsen headshot
Jens Larsen
PhD
Macro Strategist
London
Thomas Mucha
Thomas Mucha
Geopolitical Strategist
Boston

The Federal Open Market Committee’s (FOMC)’s September statement and press conference did not deliver any big surprises. The upshot is that the US Federal Reserve (Fed) appears to be committed to maintaining its “dovish” monetary policy stance for the foreseeable future.

Look no further than the Summary of Economic Projections (SEP), released in conjunction with the FOMC meeting minutes, in which the majority of participants indicated that Fed policy rates should remain around zero through 2023. This was largely expected, given the recent shift in the Fed’s inflation framework: Whereas the Fed has historically targeted an average inflation rate of 2% over time, under the new framework, the Fed could allow inflation to…

MACRO
Jeremy Forster
Fixed Income Portfolio Manager
Boston

It’s been awhile since the CPI gave us something to think about, but today I believe there is an increased (and growing) probability of an inflationary outcome driven by several factors:

  • The public health crisis is an exogenous shock (vs. the endogenous adjustment of a typical recession), suggesting a quicker recovery (influenced by the path/duration of the virus).
  • The policy response to the crisis was swift and massive. This is the first time in decades there has been coordinated monetary and fiscal easing, and it is at a scale never seen outside of wartime.
  • If Biden wins the US election, his administration will likely focus immediately on additional stimulus for the unemployed. Combined with the Fed’s “whatever it takes” approach to fighting deflation, this provides additional upside support to inflation.

Compounding the challenges faced by some institutions

The inflation/deflation outcome will have important portfolio implications for many institutional investors, including…

MACRO
Cara Lafond
Cara Lafond
CFA
Multi-Asset Strategist
Boston
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On 23 March 2020, the US Federal Reserve (Fed) launched the Secondary Market Corporate Credit Facility (SMCCF) — a special-purpose vehicle (SPV) designed to support the corporate-bond market in the face of the COVID-19 crisis. In late June, the Fed released an official list of its initial bond purchases made via this program.

The more I think about the Fed taking the unprecedented step of buying corporate bonds as part of its crisis-response arsenal, the more I believe it’s difficult to overstate the implications. Here are some of my latest thoughts on the matter.

Five thoughts on the program

In my view, the Fed’s corporate-bond-buying program:

  1. Minimizes tail funding risk. Many US corporate-bond issuers were distressed and deemed to be at risk of bankruptcy as recently as a few months ago. Then came the Fed’s bond-buying program, which is aimed at removing tail funding risk, primarily for corporates that “should” survive (based on their investment-grade ratings pre-COVID-19). The terms of the program have since been…
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Jeremy Forster
Fixed Income Portfolio Manager
Boston

Bottom line: recovery at risk

The COVID-19 crisis has eliminated the brief window for the UK government to provide macro policy clarity and constructively move the Brexit debate forward. I fear that elevated political and economic uncertainty could delay the recovery from the crisis. These longer-term risks are not a market focus currently, but will come to the fore in the recovery.

Lockdown may last longer than in Europe

The UK health crisis is evolving broadly in line with the worst outcomes in Europe but the UK might be a week or two behind. With the Prime Minister recovering from the virus, the government has yet to set out a path to reopening the economy, as at the time of writing. The UK may follow most other European countries with a very gradual opening, but the risk is…

CORONAVIRUS
MACRO

ARCHIVED

Jens Larsen headshot
Jens Larsen
PhD
Macro Strategist
London

Challenges increase for the eurozone

Recent data and developments have altered my view of eurozone economies and equities, increasing and significant downside risk in my view. Doubts about the path ahead have increased, reflecting fundamental uncertainty about the health crisis, the policy response and the subsequent economic recovery. A deep recession, a slow recovery and a steep earnings recession could weigh on eurozone equities. Relative to the recent IMF forecasts, the eurozone is likely to experience a bigger dip and a shallower recovery.

Medium term: policy response will shape recovery

In the medium term — six months to two years — the quantity and quality of the policy support will determine both how fast growth can bounce back and how far longer-term damage through job and firm destruction is avoided.

ECB intervention

The ECB’s intervention is extensive, providing ample liquidity and purchasing assets at a high pace. Asset purchases can be scaled up if necessary and I am confident that…

CORONAVIRUS
MACRO

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Jens Larsen headshot
Jens Larsen
PhD
Macro Strategist
London

China recently reported that its gross domestic product (GDP) shrank 6.8% year over year in the first quarter of 2020 – the first time in modern history that the nation’s economy has contracted. The contraction was sharper than our tracker had suggested, with the implication being that services (for which robust monthly data are not available) likely fared worse than other parts of China’s economy.

Headline: Bad, but expected

This outcome was largely intuitive and did not come as a surprise to markets in the wake of recent events. Indeed, it’s pretty clear that the COVID-19 outbreak delivered an unprecedented shock to China’s economy – one that hit the services sector harder than it did manufacturing.

On its own, I would have thought that such a poor headline GDP number would have been neutral for Chinese fiscal policy, in the sense that whatever the government did for the remainder of the year, it probably wouldn’t be able to…

CORONAVIRUS
MACRO

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Paul Cavey
Paul Cavey
Macro Strategist
Hong Kong

As the world struggles to beat back the pandemic and restart economic engines, all eyes are on the US and China. In our newest 20-minute audiocast, we explore how this crisis may affect the great-power relationship, why shifting domestic political landscapes matter, and what the re-designating of key strategic industries may mean for investors.

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Santiago Millan headshot
Santiago Millán
CFA
Macro Strategist
Hong Kong
Thomas Mucha
Thomas Mucha
Geopolitical Strategist
Boston

To be clear, no one can answer that question with any degree of certainty right now. There are still too many unknowns. But for my part, I have a hard time envisioning a scenario where the COVID-19 crisis does not leave an enduring imprint on the global landscape.

The global economy is reeling

By way of context, global growth is currently contracting at its fastest pace since the Great Depression hit in 1929. The range of potential outcomes is broad at this point, but I estimate that the economic fallout from the crisis has already shaved around 7% off global GDP, with more damage to come. Unemployment rates in most countries will likely rise by double digits as tens of millions of jobs are lost worldwide.

When might it turn for the better?

The timing of an upward turn in the economy will depend largely on the health care sector, particularly the race to find a COVID-19 vaccine, and the speed at which governments begin to…

CORONAVIRUS
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John Butler
John Butler
Macro Strategist
London

Key points

  • The eurozone crisis response is likely enough to prevent the COVID-19 crisis from morphing into a government bond crisis, but the resources and facilities of the European Stability Mechanism (ESM) require further strengthening.
  • The crisis has created lasting political scars, and higher debt levels may constrain the recovery.
  • To gain conviction on a eurozone recovery and eurozone risk assets, I need more clarity on the health crisis and more confidence in the adequacy of the fiscal response.

What does the policy response look like?

COVID-19 may be a symmetric shock in the sense that it hits all countries, but it is asymmetric in its intensity and in individual countries’ capacity to respond. In the eurozone, Italy and Spain currently look particularly hard hit. Their limited fiscal capacity may mean…

CORONAVIRUS
MACRO

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Jens Larsen headshot
Jens Larsen
PhD
Macro Strategist
London

While the long-term impact of the COVID-19 outbreak remains unclear, US officials have mobilized massive near-term fiscal and monetary support to stem the fallout. In our latest 20-minute audiocast, we discuss the potential impact on companies, consumers, and government spending when the world comes out the other side. We also touch on a few key foreign policy issues we will continue to watch.

video-iframe

CORONAVIRUS
MACRO

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Juhi Dhawan headshot
Juhi Dhawan
PhD
Macro Strategist
Boston
Thomas Mucha
Thomas Mucha
Geopolitical Strategist
Boston

Key takeaways

  • The ECB has shed most of the remaining constraints on purchases. It will be able to support an aggressive expansion of sovereign issuance this year.
  • The eurozone’s fiscal response lags behind, but will catch up over the coming weeks as growth deteriorates.
  • Eurozone political leaders will likely eventually endorse using the European Stability Mechanism (ESM), but will need to go further.

ECB’s pandemic emergency measures

The ECB has published details of its €750 billion Pandemic Emergency Purchase Programme (PEPP).

When the decision was made last week, the ECB stressed the flexibility of its implementation. This decision is the practical implementation of that:

  • Greece is included in the programme.
  • The 33% limit on the share of eurozone members’ bonds that the ECB will hold under its existing programmes does not apply to the PEPP.
  • The ECB can buy across the yield curve, from very short maturities (down to 70 days) to very long ones.
  • The ECB has accepted pari-passu treatment in the event of a sovereign-debt restructuring.

Few constraints remain

The last three points were news, I believe, and demonstrate that the ECB will disregard past constraints in order to respond to the pandemic. The remaining constraint is that the purchase amounts are guided by the ECB’s capital key, which…

CORONAVIRUS
MACRO

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Jens Larsen headshot
Jens Larsen
PhD
Macro Strategist
London

I think Congress will pass a large piece of fiscal legislation over the next month or so in response to the coronavirus fallout. Subsequent legislation is also possible, depending on the duration of the economic downturn. Given the ideological differences between Democrats and Republicans (and within the parties themselves), the legislative process could easily fail once or twice before ultimate enactment. Any legislation will need to be bipartisan enough to garner the 60 necessary votes in the Senate.

That said, I think Congress will pass something relatively soon, perhaps as early as this week, with an initial size of between 3% – 5% of GDP. (Risks are skewed toward more.) The speed with which equity markets have declined, especially over the past week, has sharpened the urgency within both the Trump administration and Congress. Going forward, Congress can and likely will…

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Michael Medeiros
Michael Medeiros
CFA
Macro Strategist
Boston
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We use technical, administrative, and procedural measures in an attempt to safeguard your personal and other information from unauthorized access or use. No such measure is ever 100% effective though, so we do not guarantee that your personal and other information will be secure from theft, loss, or unauthorized access or use, and we make no representation as to the reasonableness, efficacy, or appropriateness of the measures we use to safeguard such information. Users are responsible for maintaining the secrecy of their own passwords. If you have reason to believe that your interaction with us is no longer secure (for example, if you feel that the security of any account you might have with us has been compromised), please immediately notify us by contacting your relationship team member.

Transfer of data to other countries
Any information you provide to Wellington Management through use of the Site may be stored and processed, transferred between, and accessed from the US and other countries which may not guarantee the same level of protection of personal information as the one in which you reside. However, Wellington Management will handle your personal information in accordance with this Privacy Statement regardless of where your personal information is stored/accessed.

Changes to Terms of use

We may revise these Terms from time to time; the most current version will always be at https://www.wellington.com/terms-use. By continuing to access or use the Services after those revisions become effective, you agree to be bound by the revised Terms.

Effective as of 17 January 2014

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