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Home / Economy / World’s biggest money managers are divided on inflation’s path
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WORLD’S BIGGEST MONEY MANAGERS ARE DIVIDED ON INFLATION’S PATH

5 min read . Updated: 25 Apr 2023, 08:04 PM IST Bloomberg Premium Inflation is
proving as difficult to forecast now as it did while prices soared earlier in
the pandemic

More and more, the world’s biggest money managers are split over how much
further inflation will retreat from the highest levels in decades

Read Full Story


More and more, the world’s biggest money managers are split over how much
further inflation will retreat from the highest levels in decades.



It’s a debate that matters more than ever, as bond traders ponder the end of the
Federal Reserve’s aggressive campaign of interest-rate hikes and wager on cuts
starting within months.



On one side are firms such as Allianz Global Investors and TCW Group Inc., which
say the Fed and other central banks will prevail with their rate hikes, even if
it means upending their economies. On the other side are the likes of BlackRock
Inc. and DoubleLine Group LP, which question whether policy makers are willing
to throw millions out of work, or say inflation will remain elevated longer than
many expect. That means it’s too soon to bet on rate reductions.



The divide between investors with trillions at stake reflects just how tough
monetary policy itself has become, particularly as price pressures — from the US
to the UK and the euro area — remain stubbornly high, and with readings of
headline and underlying inflation sending mixed signals. Getting the call right
could offer the surest shot at redemption after a punishing year for both bonds
and stocks. It’s a challenge that’s put not only the largest firms in finance at
odds, but those who work inside them, too.

“We’ve had to work hard to come up with some sort of house view," said Greg
Whiteley at DoubleLine, which oversees about $96 billion. “There’s a significant
difference of opinion within senior portfolio managers here that get together
and discuss strategy."

In the end, they decided that “inflation is in fact going to be sticky," he
said. That makes the market wrong to position for Fed rate cuts this year, and
he’s looking to bet on higher yields on short-term Treasuries, the maturities
that are most sensitive to changing expectations for Fed policy.

Headline inflation has waned in the US and much of Europe after soaring amid the
pandemic and the war in Ukraine. The UK, however, is still logging double-digit
increases, and in the euro area, core measures just reached a record high.

In the US, both sides have reason for confidence. Fed officials frequently strip
out food and energy costs to ascertain longer-term trends, focusing on three
main buckets: core goods, housing services and other core services. In the first
group, inflation has cratered. In the second, pressures have stayed strong, but
are expected to ease.

The third bucket is more uncertain. It includes everything from health care to
hospitality – and hasn’t weakened much. Fed Chair Jerome Powell has called it
perhaps the most important category for the inflation outlook.

After the past year’s rate hikes, inflation expectations have become anchored,
reflecting investors’ faith in the Fed in the long-term. A measure that assesses
expectations for the second half of the next decade reflects around a 2.2%
annual rate for that period. So about in line with the Fed’s 2% target.

Investors’ task now is to divine how much pain central banks are willing to
inflict to attain their goals, or even whether a 2% target still makes sense.
The Fed’s preferred measure of inflation is still more than double that. 




STICKY CAMP

At BlackRock Investment Institute, a unit of the world’s biggest money manager,
the view is the Fed will stop tightening when damage to the economy from higher
borrowing costs becomes more apparent. For the institute’s strategists, that
point may come before there’s a severe enough recession to fully tame inflation,
leading them to add inflation-linked debt.

The sticky camp, which appears to include hedge funds with a record short bet on
10-year Treasury futures, generally sees rates higher for longer. 

It leans against the market’s current stance that the Fed will shift to cutting
in the second half of 2023, after at least one more quarter-point increase,
likely to be delivered next week. Policymakers, for their part, project rates
will end 2023 at about 5.1% — so hiking once more and holding there.

“It felt like 2022 was a year when the bond market was pricing in a Fed pause
too soon and now it feels like 2023 is the year the market is pricing in rate
cuts too soon," said Blerina Uruci, chief US economist at T. Rowe Price. 

Higher rates don’t bode well for corporate profits. With that in mind, Glenmede,
which oversees about $41 billion, has been underweight equities since early last
year.

“The punch of higher inflation, followed by higher rates, is enough of a
negative to the economy that we should see at least a mild recession and stocks
typically don’t do well even in mild recessions," said Jason Pride, chief
investment officer of private wealth at the firm.




COOLING CAMP

The flip side in the debate sees a clear trajectory of cooling prices as the
economic pain builds. 

“The strong conviction we have is that all the monetary tightening of the last
year (which is still ongoing) will probably bite soon, bite hard, and will hurt
for up to a year," Mike Riddell, who manages the £2.25 billion ($2.8 billion)
Allianz Strategic Bond Fund, said via email. 

If growth is much weaker than markets expect, “I would absolutely expect
inflation to fall below target over the next couple of years," he said. 

The fund is long core-rate duration given the risk of a severe downturn, he
said.

TCW, meanwhile, is positioned for an outcome that aligns with the market’s bets
on the Fed path.

“The bigger picture for us is that even though we don’t think inflation is going
quickly down to 2%, the disinflationary trend is in place," said Steve Kane,
co-chief investment officer at the firm, which manages $205 billion. 

“We like the front end of the yield curve," he said. “When the Fed eases — and
that’s a key part of it — that front part of the yield curve rips."

It’s a result he says may take a few quarters to play out.




STAGFLATION RISK

There’s a third scenario to consider. Anna Wong at Bloomberg Economics sees not
just a recession, but “growing stagflationary risks in the rest of the year."
That environment could pressure both bonds and equities, with inflation still
elevated as growth weakens.

What it boils down to is that inflation is proving as difficult to forecast now
as it did while prices soared earlier in the pandemic. 

In June, for example, economists surveyed by Bloomberg predicted a 5.1% annual
rate for the final quarter of 2022. It came in at 5.7%. Fed policy makers didn’t
do much better: In June, they saw year-end headline inflation of 5.2%, based on
their median projections.

“The drivers of inflation are so many and varied: There are both demand and
supply factors, short and long-term factors," said Jonathan Gregory, head of UK
fixed income at UBS Asset Management. “People have been getting inflation wrong
for a very long time."

 

Catch all the Business News, Market News, Breaking News Events and Latest News
Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
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