Global Economics & Market Strategy

Economics Weekly View: Black Swans-led Uncertainties May Mean Short-Term Risk Off

19 April 2024
 

Barnabas Gan Acting Group Chief Economist & Head, Market Research

• Despite the ongoing Middle East tensions, our full-year global growth assumptions are for risk appetite to remain in risk-on mode. We keep our global growth assumptions for a rosier 2024 backdrop in view for tensions to stay isolated with selected members of the Middle East region. However, black swan-led uncertainties could mean a short-term return to risk-off mode; we advocate some asset allocation into quality assets and safe havens, such as gold and US treasuries. Recent escalations have led to higher gold prices and lower UST yields, with crude oil prices rallying back to their US$90 per barrel handle. 
   
• Our recent thematic report suggests two probable scenarios: (1) base case is for tensions to stay isolated within selected members of the Middle East, thus suggesting that the collateral damage may be limited to the broader region and the Group of Seven (G7) members, while the (2) worst case is for military intervention by further escalation of current tensions – to be a tail-end risk at this point, defined as tensions spreading into the broader Middle East region coupled with a military move by selected G7 economies. Our base case supports our global growth assumptions, as mentioned. In the worst-case scenario, we see a negative impact on about 40% of global GDP, 50% of global total trade, and 30% of international investments, while Brent crude may rally to its US$140 per barrel handle. 
   
• The renewed Middle East tensions reinforce our view that global inflation will persist. As cited in our previous weekly report, we view US core PCE inflation to trend higher than the 2.0% handle by the end of 2024, suggesting that core prices are not trending towards the path of 2.0% in 2024. Higher crude oil prices seen in the past two weeks, coupled with further upside in global food and base metal prices, all suggest a period of elevated inflation for the year ahead. The implications are (1) we recently downgraded our outlook for the US Fed Funds Rate to see only one cut towards 4Q24, with the balance of risks magnified towards no cut for the whole year, (2) DXY will continue to trend higher towards the 110 handle, thus putting pressure of broad ASEAN FX pairs, and (3) UST 10Y yields, which may see a knee-jerk fall due to tensions, may head towards 5.0% as market participants gradually price out FFR cuts in 2024. 
   
• Latest Fedspeak has seen a dramatic shift in rhetoric, with officials now turning relatively hawkish. Fed chair Jerome Powell commented, "It is appropriate to allow restrictive policy further time to work". Fed Bank of New York President John Williams said that FFR hikes may be possible, albeit it is not his baseline expectation. Meanwhile, Atlanta Fed president Raphael Bostic noted he doesn't think it will be appropriate to ease until the end of 2024. At the same time, Minneapolis President Neel Kashkari said the Fed could "potentially" hold rates steady for this year. Overall, we do not think the market is done pricing out FFR cuts for this year; further revision of rate cuts towards one, or potentially zero, will likely persist into 2H24. 
   
• Closer to home, Malaysia's 1Q24 advance GDP saw a respectable 3.9% YoY growth, accounting for only January and February's data releases. We pencil upside bias towards 4.2% YoY for the final GDP print scheduled to be released on 17 May 2024. Based on the seasonal adjustment (X-13 ARIMA), Malaysia's GDP growth momentum has accelerated to +0.9% QoQ (3QMA) in 1Q24, against +0.7% QoQ (3QMA) in 4Q23. We keep our full-year GDP forecast at 4.6%. 
   

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