- We expect two inflation scenarios moving forward and caution investors against both scenarios given the consequent implications on asset classes.
- For the central case, our higher probability scenario, we see hot inflation prints in 2H21 before cooling off in 2022 and 2023. In this scenario, core PCE will likely settle between 2 - 3% over the next two years.
- For the hawkish case, our lower probability scenario, we see hot inflation prints extending beyond 2021 and core PCE to remain above 3% over the next two years, reflecting our view of a high level of persistent inflation.
- Both our central and hawkish case points to a reversal in the interest rate cycle in late 2022. For the former, we anticipate one rate hike around end-2022 and up to two hikes in 2023. For the latter, we anticipate two rate hikes in 2022 and up to two - three hikes in 2023.
- With the higher inflation backdrop presented in both cases, we believe inflation risk is currently underpriced. For our central case, we expect yields to reach 2-3% over the next two years. If our hawkish case materialises instead, yields may surge even higher to 3-4% in the same timeframe.
- For our hawkish case, we expect equities to struggle if the 10-year yield climbs to 3-4% within the next two years. An earnings yield of 6.1% for global equities and a 3-4% yield would imply an excess yield of 2.1 to 3.1%, which is below the 10-year historical average of 3.5%. This implies that bonds should be relatively more attractive than equities.
- For our central case – we expect equities to be able to digest a 10-year yield of below 2.7%. An earnings yield of 6.1% and 10-year yield of 2% - 2.6% would imply an excess yield of 3.5% to 4.1%, which is above the 10-year historical average. This implies that equities should be relatively more attractive than bonds.
Our US Inflation Outlook
Chart 1: Core PCE inflation decomposed by Covid sensitive and insensitive components
Chart 2: Core PCE inflation adjusted for base effect
Chart 3: Rising home sales price implies higher housing-related inflation (19% of Core PCE) to come
Different Inflation Scenarios to Prepare For
Table 1: Our central and hawkish case for US inflation
Source: iFAST research. Data as of July 2021. Chart 4: Inflation over the next 1-2 years may settle at a higher level as compared to post-GFC
The Impending Reversal in Interest Rate Cycle
Chart 5: We expect a reversal in the interest rate cycle in late-2022
Our Central and Hawkish Case Portend Higher Treasury Yields
Chart 6: 10-year treasury yields, which have declined over the years, may turn higher on the back of rising inflation
Investment implications for both central and hawkish case
Chart 7: Excess yield (earnings yield to bond yield spread) currently marginally above historical average
Table 2: The asset allocation implication for each case and the corresponding yield projection
Source: iFAST research. Data as of July 2021. Chart 8: Various asset’s beta to inflation breakeven – Measures how the asset price move when inflation breakeven changes
All materials and contents found in this site are strictly for general circulation and informational purposes only and should not be considered as an offer, or solicitation, to deal in any of the funds or products found/identified in this site. While iFAST Financial Pte Ltd ("IFPL") has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies and typographical errors. Any opinion or estimate contained in this report is made on a general basis and neither IFPL nor any of its servants or agents have given any consideration to nor have they or any of them made any investigation of the investment objective, financial situation or particular need of any user or reader, any specific person or group of persons. You should consider carefully if the products you are going to purchase are suitable for your investment objective, investment experience, risk tolerance and other personal circumstances. If you are uncertain about the suitability of the investment product, please seek advice from a financial adviser, before making a decision to purchase the investment product. Past performance is not indicative of future performance. The value of the investment products and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. In respect of any matters arising from, or in connection with the said research analyses or research reports, recipients of the report are to contact IFPL at 10 Collyer Quay, #26-01 Ocean Financial Centre Building, Singapore 049315, or by telephone at +65 6557 2853. Where the report contains research analyses or research reports from a foreign research house and if the recipient of such research analyses or research reports is not an accredited investor, expert investor, institutional investor or an ex-accredited investor, IFPL accepts legal responsibility for the contents of such analyses or reports to such persons only to the extent as required by law. Please note that only certain security(ies) herein are available to all investors, while the rest are only available for certain persons to invest in, such as Accredited Investors (as defined in the Securities and Futures Act) or one who invests at least S$200,000 (or its equivalent currency) per transaction. To qualify as an Accredited Investor, one needs to submit a declaration form and certain relevant supporting documents, according to iFAST’s prevailing policies and procedures.
Please read our full disclaimers on the website at ( https://secure.fundsupermart.com/fsmone/policies/328125/investment-account-terms-&-conditions).
iFAST Financial Pte Ltd (IFPL) (registered address: 10 Collyer Quay #26-01 Ocean Financial Centre Singapore 049315, Telephone: 6557 2000) holds the Financial Advisers Licence issued by the Monetary Authority of Singapore ('MAS') to conduct regulated activities of advising on securities, marketing of collective investment schemes and arranging of any contract of insurance in respect of life policies, other than a contract of reinsurance and the Capital Markets Services Licence issued by the MAS to conduct regulated activities of dealing in securities and providing custodial services for securities. While IFPL has made every effort to ensure the independence of the report's contents, IFPL's nature of business is such that IFPL and its connected and associated entities together with their respective directors, officers and staff may be involved in providing dealing or investment-related services in the abovementioned securities, and have taken or may take positions in the securities mentioned in this report, and may also act as the principal for any buy or sell trades.