"An inflation hill moment approaches," says Charlie Jamieson

The macro-environment ahead is largely good news for investors, says Charlie Jamieson, CIO of Jamieson Coote Bonds. “The prospect of rising inflation is opening a window that’s really interesting,” he explains in a recent video update.

Describing what he terms the “autonomy of the bond sell-off,” Jamieson notes there isn’t yet any realised inflation. “But there is an expectation that it will come, and that it will peak in the middle of the year for the US, a bit later in Australia and then further into quarters three and four in Europe.”

US President Joe Biden’s latest tranche of stimulus, targeting infrastructure investment via tax hikes, could hold important implications for the continuing high growth environment in the US alongside risk asset performance – particularly the “tax hikes” part of the story, Jamieson says.

“It would repeal a lot of Trump’s tax cuts, which a lot of the market really enjoyed back in the day. So that’s certainly something to watch.”

Jamieson also casts an eye over oil prices, which shocked markets last year when they turned negative after pandemic lockdowns emerged in China, before jumping over to Italy and cutting a swathe around the globe. 

And the trajectory of the likely rise in inflation is something he’s particularly interested in, labelling it a reflation effect, as distinct from a more gradual inflation rise.

“We need to look at the transient factors and the persistent factors that may occur,” he says. “This rise in inflation followed by a steep decline is the view from some parts of the market, and that’s our belief too.” This will shake up asset allocation for investor portfolios, from risk-free through to credit and risk assets.

Zeroing in on the local market too, the following video assesses the domestic economic response as JobKeeper winds down; what the onset of winter in the southern hemisphere will mean for the “stop-start-stop” COVID recovery; and how vaccination program rollouts abroad and locally are affecting us.

Transcript

Over the course of March, we had much more stability in fixed income markets after a tumultuous month in February. We made a very long video last month, and we won't subject you to that again, but we do have some important things we wanted to discuss that have occurred over the course of the month.

President Biden has pushed forward again with another stimulus programme, this time targeting infrastructure. Although, critically this time he wants to finance this by tax hikes. We think this is tremendously important. Obviously, the stimulus is encouraging. It will continue to foster a high growth environment in the United States. But the funding via tax hikes is interesting, and we do believe that that can interplay with risk assets in time. It would repeal a lot of the Trump tax cuts, which clearly risk assets really enjoyed back in the day, so that's certainly something to watch.

As we head into the second quarter, we've got to rise up this inflation hill moment. And this is mainly to do with the base effect of inflation as it's calculated in a year on year manner. Remembering of course, this time last year, we had the lockdown starting in China that moved on to Italy, that really went global. And throughout that period, we ended up having negative oil prices in oil delivery futures contracts. No one could store physical oil as the world stopped. And oil prices went negative, which was tremendously deflationary at the time. In the year on year calculations, that very deflationary data is about to fall out, and the base effect will allow for new data to be loaded into that calculation, which will make inflation lift tremendously. And so we would expect that to peak in and around the May or June period in the United States. And you're going to hear a lot about this inflation narrative in the next few months, but it's really important to recognise what is actually occurring here.

We've actually written a huge white paper on this. We're very happy to provide you with a copy. It's tremendously long, but we've surmised each section to make things easier. But there's a lot in play here. There's actually a reflation, which is the take-back of a deflationary period primarily, rather than a sustainable inflation. And we really need to understand the transient factors versus the persistent factors that may occur. In every inflation forecast we can see, even from the very optimistic inflationists, they have this hill or this rise in inflation followed by a steep decline. And we absolutely believe that as well.

We've also looked at the secular disinflationary forces that have been so prevalent in markets before this period to see if they'll still hold thereafter, because we think this has tremendous asset allocation impact right through the system be that in our risk-free complex, which we manage through the credit complex, credit being that financial lubricant that makes the whole economic machine work all the way out to risk markets, and it's tremendously important.

I think with that also the autonomy of the bond sell-off is something which will be very interesting given that bond sell offs tend to happen on expectation. As we've seen already, we don't have any realised inflation at this stage, but there is expectation that it will come and it will come via this base effect. And it will peak in the middle of the year, roughly, depending on geography, about the middle of the year for of the United States, a little bit thereafter for Australia, and then further into the Q3, Q4 period for Europe. But we want to take you through that journey because we think it can open a window that's really interesting for investors.

I guess last month we talked at length about the way that volatility in our complex often doesn't last and it can skip into other asset markets very easily. The passing of Biden's $1.9 trillion stimulus programme has probably masked over some of that volatility jump for now. But it's not going to last forever. Those cash transfers are occurring. We know that we've had very, very powerful growth in the US and the economy is actually going pretty well. To be stimulating to that degree is a little dangerous because what comes thereafter can be more of a concern. And the markets will look forward to this and have expectations about this. So we think it's interesting. Can the bond market move ahead of these realisations and potentially peak as the realisations occur, if not before, that's entirely possible. So we want to take you on that journey and give you a big summation to those kinds of outcomes.

Over the course of March, most of our products have done pretty well. They've had a good bounce back out of February's performance, but we do expect that it's going to continue to be volatile into these higher inflation prints, which central bankers are reminding us are tremendously transitory, and we should look through, but we've got to see how the market's really going to react to that.

Looking ahead, as we look out across the fixed income universe, we also have a period of very high seasonality coming into the middle of the year. And we'll be interested to see how the domestic economy evolves as JobKeeper is now wound down at the end of the month, combined with more COVID hotspots. Brisbane is going through some issue at the moment as we film this. We don't expect to be able to get through winter in unscathed manner. If we can have lock downs here in Melbourne, in February, in the absolute height of summer, what does that look like into winter? I think it's still going to be a little bit more stop, start, stop as we get through the year. But the other flip side of that is the Northern hemisphere is clearly going to open up. The COVID wave is coming under control. There are still variants, which are causing some concern, but vaccinations continue in a very robust manner and we do expect that the Northern hemisphere economies will open up and start to garner some of that high growth that we've been expecting as people are released from lockdown, particularly in the European and UK economies.

So lots to think about, lots to look forward to. We look forward to going on that journey with you. Our inflation white paper, Over the Inflation Hill, will be out just after Easter and we look forward to chatting to you about it. Thank you very much.

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