Summary

 

Inflation is easing across the globe. Nevertheless, it remains above many of the central banks’ inflation targets. While headline consumer prices in the US slowed to 5% year-on-year in March, the core inflation figures remained high. Markets thus expect the US Federal Reserve to raise rates once more by 25bps at the upcoming May meeting.

Where will all the Chinese deposits go

A similar picture is evident in the eurozone with core inflation moderating at relatively high levels. German inflation was much lower in March but still came in above forecast. Lower energy prices saw inflation slide in France, but underlying pressures remain high, especially food inflation. All of this is adding pressure to the European Central Bank to continue to hike rates.

Meanwhile in Asia, inflationary pressures have been more benign. The recent declines were mostly driven by slower gains in goods and energy prices. As such many Asian central banks (ACBs) have paused on rate hikes for now. ACBs too typically tend to be more growth focused; the Monetary Authority of Singapore paused on the monetary policy tightening in April amidst signs of a slowing economy. That said, Thailand and Philippines raised rates, but these were in line with expectations.

China remains an exception; it is the only major economy that is experiencing deflation and the People’s Bank of China is widely expected to hold rates steady given that China's GDP growth beat expectations in the first quarter of 2023.

As the inflation dynamics vary across Asian economies, there will still be near-term divergence in policy direction. Further out, ACBs will be guided by both global and domestic developments. For now, barring unforeseen shocks, the end of the rate hiking cycle seems in sight. But if growth starts to falter or the US Fed starts to cut rates faster than expected, then ACBs are likely to follow suit.

Given this backdrop, Eastspring Singapore’s fixed income team is generally constructive on duration for its Asian local currency bond portfolios and will look to increase duration relative to the respective portfolios’ benchmarks incrementally at appropriate price levels as and when market opportunities present themselves.


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