This material is intended for Institutional Investors (as defined in the Securities and Futures Act, Chapter 289 of Singapore) only and is not suitable or intended for persons who do not qualify as such.
As more economies begin to reopen, stronger data is showing that the cyclical recovery from the lockdowns-induced slump is progressing well. However, signs of rising inflation globally will test investors’ nerves as they seek to assess whether the price pressures are transitory or signalling a regime change.
Although globally new daily infections with COVID-19 have remained close to record highs, they have started to decline in most developed economies. The UK now has the lowest infection rate among major European countries, with half the UK population vaccinated. Until now, new UK cases involving the Indian variant have not changed the trend.
The situation in India remains an exception and is currently responsible for about half of the new cases around the world. Thailand, Malaysia, and now South Africa are seeing more new cases, while vaccinations programmes there are just beginning.
In the eurozone, the recent pick-up in the pace of vaccinations together with a substantial increase in the supply of vaccines in the second quarter has set the stage for a further normalisation of activity and for pent-up demand to be released. We expect this to drive a robust recovery in the months ahead.
A further relaxation in pandemic restrictions across the continent should spur leading indicators such as the purchasing manager indices. The latest PMIs are due to be released on 21 May.
The economic recovery should be particularly apparent in the ‘peripheral’ economies and the UK, where lockdowns have been eased significantly in recent weeks, allowing for another leg-up in services activity. The UK can be seen as a leading example: high-frequency data already have been pointing to a strong rebound in consumption.
Last week’s data on US core inflation in April blasted through expectations (see Exhibit 1). As things stand, these price pressures should be temporary, reflecting demand-supply imbalances and other short-term distortions that should be absorbed over time.
However, as outlined in the comprehensive analysis we published this week on US inflation, one of the keys to what happens next is how these short-term price distortions might affect inflation expectations of both consumers and businesses. 
Last week’s sharp increase in the University of Michigan’s inflation expectations – the largest rise since 1993 – is an example of what may lie ahead.
Recent commentary by senior members of the US Federal Reserve will likely continue to hammer home the message that the rise in inflation is transitory, both in nature and in its effect on the underlying dynamics.
Minutes of the Federal Open Markets Committee’s April meeting will be released this week, although they will be somewhat dated as the policy meeting preceded both the disappointing April jobs report and the strong April consumer price inflation (CPI) release.
We expect the minutes to reiterate Chair Jay Powell’s message that while the outlook has improved, the FOMC sees a tapering of the Fed’s asset purchases as way off and regards the rise in inflation over the next few months as temporary.
The consensus view is that the European Central Bank will decide to slow its COVID-related emergency bond purchases at the monetary policy meeting on 10 June, when the central bank is expected to also raise its forecasts for growth and inflation for the next few years.
Eurozone inflation has rebounded this year, climbing to 1.6% in April, having been negative late last year. To date, the ECB has forecast that price growth in 2021 will exceed the central bank’s target of just below 2% for the first time in more than two years.
Looking ahead, it is quite possible that eurozone inflation drifts higher over the course of the year due to rising energy prices and the release of pent-up demand as the economy reopens further.
Inflationary pressures are likely to rise across the board and intensify. Most EM countries showed an acceleration in price gauges in April, with 15 out of the 19 main economies registering increases.
Inflation across emerging economies is set to rise and extend into the second half of the year. However, as the momentum of the economic recovery has ebbed, EM growth data will likely confirm there was a slowdown or contraction in the first quarter.
Recent data shows China’s economic activity moderating and the credit impulse slowing. Industrial production and retail sales decelerated by more than expected in April.
Singapore’s exports data, which are usually a fair indicator of demand for manufactured goods globally, expanded by an underwhelming 5% YoY in April. This was well below the 20% increase in the consensus forecast, hinting at slower external demand.
Most Asian stock markets fell in the wake of the surprisingly strong US CPI data. Taiwan lost 8.4% in the past week, with the worsening COVID-19 situation dragging the index down further.
Lower US real yields and a less hawkish view on future US monetary policy is resulting in a weaker bias on the US dollar. Growing expectations of EM rate rises (especially for Latin American and CEEMEA countries) and continued buoyant commodity prices are supporting EM currencies versus the US dollar.
Having said this, April’s softer Chinese activity data (with retail sales, industrial production and fixed asset investment all declining) may act as short-term headwinds for EM currencies.
 Read Inflation risks, regimes and implications for Treasury markets to find out what this would mean for the decades-long bull market in government bonds.
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
This material is produced for information purposes only and does not constitute: 1. an offer to buy nor a solicitation to sell, nor shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever or 2. investment advice. It does not have any regards to the specific investment objectives, financial situation or particular needs of any person. Investors should seek independent professional advice before investing, or in the absence thereof, he/she should consider whether the investments are suitable for him/her.