Skip to main content
Select your role:
  • Individual Investor
  • Intermediary
  • Institutional investor

Manulife InvestChoice – 2023 Q2 Global Macro Outlook

April 2023

Events of the past quarter have strengthened our conviction on several of the team’s core economic views.

  • To be cautious about the risk-on price action in January given we had expected H1 to be bumpy
  • The full impact of prior policy tightening has yet to filter through to the real economy
  • A global recession is likely within the next 12 months
  • Investors may need to reassess their belief that the U.S. Federal Reserve (Fed) will always come to the market’s rescue

In our view, the macro backdrop will get worse before it gets better in the current global economic cycle, and investors should expect to experience higher and longer bouts of volatility through H123. 


At this point, we believe it’s crucial to reassess how we should be thinking about the Fed’s approach to policymaking, especially in the context of the second biggest bank failure in U.S. history, which has raised doubts about the health of the U.S. banking system.


Recent developments are pointing to the increased likelihood that the Fed could be more comfortable with the idea of financial volatility. We believe the central bank’s recent surgical approach to instilling financial stability in the aftermath of the U.S. regional banks’ fallout points to that. Understandably, that wouldn’t be welcome news for markets, which would have to let go of their long-held assumption that the Fed will always step in to save the day. In our view, a reset in investors’ mindset could be warranted.


From an investment perspective, we continue to focus on more defensive positioning and a risk-off bias. That, however, doesn’t preclude other opportunities in the global macro environment, and our Q2 2023 outlook highlights several of them. That said, it does mean that market participants may have to dig deeper and be more selective as they absorb the implications of what could be the Fed’s new decision-making function.


U. S.: There are few who question the likelihood of a U.S. recession in the coming months, but the timeline for when we get there is subject to debate.

There are few who question the likelihood of a U.S. recession in the coming months: Leading economic indicators ranging from money supply growth to the yield curve to business surveys and residential construction activity all point unambiguously in that direction. What is up for debate, however, is how long it will take to get there. So far, the U.S. consumer is holding up well and the labor market’s still running hot; if neither slows down, it’s difficult to make a strong case for any economic deterioration. At this stage, we believe the economy will slip into a recession around Q4 this year.

From a monetary policy perspective, we view the Fed’s reaction function to inflation as being timeline based. Disinflation in goods—which we’re seeing now—is, in our view, a precondition to pausing the current tightening cycle. Over a longer horizon, easing services inflation, which is linked to wage growth, is likely to be the hurdle for the Fed to clear to begin easing. To get to that point, a weaker labor market is likely required.


Asia-Pacific: Price pressures in emerging Asia appear to be easing with headline inflation starting to decline in many economies. As a result, central banks have started to slow the pace of monetary tightening.

Price pressures in emerging Asia appear to be easing with headline inflation starting to decline in many economies. As a result, central banks have started to slow the pace of monetary tightening: In January, Bank Negara Malaysia became the first major central bank in the region to pause, keeping rates at 2.75%. In February, Bank of Korea followed suit, pausing at 3.50%, as did Bank Indonesia at 5.75%. Elsewhere, Bank of Thailand raised rates in January by 25bps, to 1.50%; the Reserve Bank of India (RBI) hiked by 25bps, to 6.50%, in February; and Bangko Sentral ng Pilipinas went for a 50bps hike in February, pushing the country’s policy rate to 6.00%.


We note, however, that policymakers are generally turning more dovish, barring a few exceptions. A drop in price pressures combined with a deteriorating outlook for growth will likely open the door for many of the region’s central banks to bring their tightening cycles to a close in coming months. In our view, rate cuts in H2 will be contingent on a weaker USD and a further drop in food, fuel, and energy price inflation. A potential risk to that view relates to the fact that headline inflation readings can exaggerate the extent to which the inflation threat has diminished. Core inflation, which is a better measure of underlying price pressures, is still rising and is now at multi-year highs in many economies.


Euro area: Price pressures are elevated with headline inflation holding well above the ECB’s 2.0% target as core inflation continues to climb to fresh record highs.

Europe’s economic outlook is improving on the back of a meaningful recovery in global growth expectations following Mainland China’s reopening. Energy-related concerns have moderated, and leading sentiment indicators are pointing to a significant recovery in economic activity. Resilience in the services sector remains a concern for policymakers as the European Central Bank (ECB) maintains a focus on wage growth and inflation.


Price pressures are elevated with headline inflation holding well above the ECB’s 2.0% target as core inflation continues to climb to fresh record highs. Rate expectations are rising, and market pricing of the ECB’s terminal rate is pushing well above 4.0%.1 That said, we think the outlook for relative central bank policy is offering meaningful fundamental support for the euro (EUR) and should pave the way for sustained upside for the currency, particularly against the U.S. dollar (USD). In our view, financial stability risks are rising as the ECB pushes forward with its plans for balance sheet reduction; however, European bond spreads remain contained.


Disclaimer – Quarterly Macro Outlook

Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation. The information and/or analysis contained in this material have been compiled or arrived at from sources believed to be reliable but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness or completeness and does not accept liability for any loss arising from the use hereof or the information and/or analysis contained herein. Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained herein.

This material was prepared solely for educational and informational purposes and does not constitute a recommendation, professional advice, an offer, solicitation or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security. Nothing in this material constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. The economic trend analysis expressed in this material does not indicate any future investment performance result.   This material was produced by and the opinions expressed are those of Manulife Investment Management as of the date of this publication, and are subject to change based on market and other conditions. Past performance is not an indication of future results. Investment involves risk, including the loss of principal. In considering any investment, if you are in doubt on the action to be taken, you should consult professional advisers.

Proprietary Information – Please note that this material must not be wholly or partially reproduced, distributed, circulated, disseminated, published or disclosed, in any form and for any purpose, to any third party without prior approval from Manulife Investment Management.

This material is issued by Manulife Investment Management (Hong Kong) Limited. This material has not been reviewed by the Securities and Futures Commission (SFC).