There are four main channels of transmission: 1) higher energy and food prices, 2) disrupted supply chains and trade flows, 3) tighter financial conditions, and 4) lower business and consumer confidence due to heightened uncertainty. 1) An ‘anti-Goldilocks’ economyįirst, the global economy and policymakers are confronted with a stagflationary supply shock that is negative for growth and will tend to push up inflation further.
We will discuss the longer-run, secular ramifications of the current situation at our upcoming Secular Forum in May. And so our discussions of the macro outlook remained more high-level than usual, mindful of the wide range of possible scenarios and of the potential for nonlinearities and abrupt regime changes in the economy and financial markets.ĭespite the many unknowns, we developed five main conclusions regarding the cyclical six- to 12-month outlook that we think are most relevant for investors at this stage. In a radically uncertain environment, detailed point forecasts are therefore not particularly helpful in shaping investment strategy. In contrast to risk, which can be quantified by assigning probabilities to outcomes based on experience or statistical analysis, uncertainty is essentially unmeasurable and represents the unknowable unknowns. There was one thing that PIMCO’s investment professionals immediately agreed upon when we gathered – mostly virtually again – for our recent quarterly Cyclical Forum: Russia’s invasion of Ukraine, the sanctions response, and the gyrations in commodity markets cast an even thicker layer of uncertainty on what already was an uncertain economic and financial market outlook before the onset of this horrific war.Īt the outset, we reminded ourselves of the concept of radical or Knightian uncertainty, which has been a recurrent theme in our discussions at PIMCO over the years (see, for example, “ King, Keynes and Knight: Insights Into an Uncertain Economy,” July 2016). We tend to emphasize keeping powder dry in an effort to take advantage of dislocations in equity markets as they arise. ♦In equity markets, the current environment favors high quality and less cyclical companies, in our view.Commodities can also play a role in mitigating upside inflation risks. We may see meaningfully higher commodity prices as buyers look to reduce dependency on Russian exports.
Treasury Inflation-Protected Securities (TIPS) as a reasonably priced way to mitigate upside U.S. ♦We do not expect to have large positions in risk assets given market vulnerabilities, but we may add to spread risk opportunistically in select investments that we see as default remote.We expect to target modest duration underweights and to de-emphasize curve positions. ♦In this uncertain environment, our investment strategies tend to favor portfolio flexibility and liquidity to respond to events and potentially take advantage of opportunities.Most central banks seem determined to fight inflation more than support growth, and we expect relatively muted fiscal policy support from governments over the cyclical horizon. ♦The war in Ukraine and sanctions will likely lead to a greater dispersion of growth and inflation outcomes among countries and regions.However, there are obvious risks to this outlook, especially if the Russia–Ukraine war escalates further, including the risk of a recession over the cyclical horizon. In our base case, growth remains supported by the post-pandemic economic reopening and pent-up savings bolstering demand, and inflation may peak in the next few months and then moderate gradually. ♦Significant uncertainty clouds the outlook as the global economy confronts a shock that is negative for growth and will likely spur further inflation.
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