Although she has a background in emerging markets, Tan’s role is to look at all the key drivers that might change their asset allocations, and she said the consumer price index isn’t the best gauge of how the central banks’ monetary policy is influencing inflation because it’s a lagging indicator. She relies more on some of the components in the Purchasing Managers’ Index (PMI).
“The reason we’re focusing on inflation is we want to see it start to trend down on a sustainable basis,” she said. “That will give us some level of comfort or visibility that the central banks are closer to an end in the rapid pace of rate hikes. That will be positive in terms of what it means for asset prices, what it means for bond prices, and potentially what it means for whether or not we achieve a soft landing or have a hard economic landing. The soft landing would be if the central banks can get the economy to slow down to a low single digit, but it doesn’t quite turn negative.”
Tan said that focusing on inflation will drive her view on the interest rates as well as what earnings could look like. If the landing is softer, earnings may not decline as much as feared.
“We’re really waiting to see when the pace of rate hikes will start to pause and potentially just stop at some point,” she said. “Until that point, we still have a cache of what we call a tactical cash buffer: so, not a long-term cash call, but we’re just waiting for opportunities.”
Tan said some of the PMI’s components are showing that supplier delivery times are improving and input prices have decreased. But, she noted that the central banks now are concerned about the inflation anchor in case consumers begin to anchor their inflation expectations higher than 2%, which could then drive wages up.
