Manulife's Trinh said while disinflation is broadening in earnest, inflation remains well above target for many economies.
PETALING JAYA: With core inflation easing at a slow pace and exports remaining weak, the balance of risk to the growth outlook of Asia-Pacific countries remains skewed to the downside.
In a recent report, Manulife Investment Management co-head of global macro strategy Sue Trinh said while disinflation is broadening in earnest, inflation remains well above target for many economies, with core inflation tracking above 2.5% year-on-year in nearly all the economies in the region.
“We had anticipated that slowing growth and inflationary pressures would open the door for many of the region’s central banks to bring their tightening cycles to a close.
“Our observation, however, is subject to the condition that core inflation, which is a better measure of underlying price pressures, is declining in a reasonable timeframe.
“So far, data shows that core inflation is easing very slowly and remains well above average in almost every economy in the region. Recent developments indicate that the anticipated timing of dovish pivots has been delayed,” she said.
Given such a backdrop, Trinh noted that central banks in the region may continue with monetary tightening policies until inflation is within target and there is sustained softening in core inflation.
To recap, the Reserve Bank of Australia (RBA) had hiked interest rates at its two previous meetings to a total of 50 basis points (bps) since pausing in April, bringing rates to 4.10%.
The next RBA Board meeting and official cash rate announcement is scheduled on Aug 1, 2023.
On the other hand, the Bank of Korea and the Reserve Bank of India pushed back against the possibility of early interest rate cuts, when they delivered hawkish pauses at 3.5% and 6.5% respectively.
Moreover, the Bank of Thailand, noting that further policy normalisation is still appropriate, raised its policy rate by 25 bps to 2% last month.
It was also observed that the manufacturing output in Asia is dragged down by weak external demand and elevated inventory levels and signs of bottoming out for exports is still being observed.
“We’re paying particular attention to developments in South Korea where headline exports extended their decline in May, plunging 15.2% year-on-year, in line with the contraction in headline manufacturing purchasing managers’ index (PMI) that came in at 48.4 in May,” said Trinh.
The equities market appears to have a positive outlook, underpinned by expected widening in gross domestic product growth differentials versus both developed markets and other regions within the emerging-market universe, as well as less worrying inflation levels.
“Central banks in the region are also likely to make a dovish pivot sooner.
“That said, the rising risk of a global recession unfolding implies higher volatility, continued weakness in global trade and tighter US dollar funding, which suggests that an additional screen for relative strength in external liquidity metrics could be helpful.
“For fixed income and currencies, in our view, regional policymakers are not likely to match the timing nor the scale of the Federal Reserve’s tightening cycle.
“This suggests likely outperformance in regional bonds and underperformance in local currencies,” Trinh said.
Zooming in on China, Trinh stated a sustained recovery in household consumption and property sales would be required in order for the economic powerhouse’s cyclical rebound to strengthen beyond the mechanical boost.
