Global Economics & Market Strategy

Economics Weekly View: Continued Revision of Market Pricing of FFR Cuts Is Expected

26 April 2024
 

Barnabas Gan Acting Group Chief Economist & Head, Market Research

• As we approach the end of April, we are reminded of recent exogenous events in the backdrop, and how global economic sentiment remains relatively undented. The quick dissipation of geopolitical tensions has led market watchers to turn back to risky assets in the last week, while Taiwan’s earthquake has quickly proved to be a non-event. Year-to-date, the S&P 500 rose 5.84%, with Nasdaq (+4.0%) and Dow Jones (+1.05%) following suit. In other markets, we note relatively supported risk appetite, with Euro Stoxx 50 (YTD: +9.98%), Nikkei (YTD: +13.4%), Hang Seng (YTD: +6.5%) and CSI 300 (YTD: +5.5%). Our global growth assumptions remain sanguine, whereby our asset allocation strategy for overweight (OW) equities has materialised nicely.
   
• We expect one US Fed Funds Rate cut by the end of this year, with the balance of risks magnified towards no cut. Tonight’s US core PCE inflation will likely be a tipping point for us to revise our FFR cut assumptions – our US core PCE model suggests that a persistent 0.3% MoM print from now to year-end suggests year-end core PCE inflation at above 3.0%. In comparison, any acceleration to 0.4% MoM may lift year-end core PCE inflation to above 4.0%. Suffice it to say, we think US inflation is not on the path towards the 2.0% handle. Thus, despite elevated inflation, any cuts this year must be met by a sudden deterioration of US labour conditions, which is not our base case. The quick revision of market pricing of FFR cuts, now at a mere 1.3 at year-end, has likely sent ripples across both global policymakers and investors  - Bank Indonesia has bucked the trend with a rate hike, 
   
• The implications for our global views remain firm: We continue to see DXY strength towards 110 in 2Q24, with the UST 10Y yields approaching 5.0%. We think that the market pricing out of FFR cuts, although materialising nicely to our view, is not done yet; we think market pricing will gradually move towards one cut, and should US inflation stay elevated, to adjust towards no FFR cuts for 2024.
   
• Regarding the Bank of Japan, we keep our full-year policy rate at 0.0 to 0.1%, with the balance of risks tilted towards a rate hike to 0.1 – 0.2% in 2H24. In the latest BOJ meeting, Chief Kazuo Ueda commented that the price trend is “still below 2.0%”, suggesting that further tightening at this juncture is not yet warranted. With BOJ keeping its rate unchanged the JPY fell to its multi-decade low of around 156 per USD, against our view for JPY to average 156.68 in 2Q24 (report – page 7). More importantly, Ueda commented that BOJ’s monetary policy is not aimed at controlling FX rates directly, thus suggesting that further weakness in the JPY, if any, may not move the needle regarding BOJ’s future moves. 
   
• Closer to home, Malaysia’s March CPI inflation sustained at 1.8% YoY compared to a similar reading in the previous month. The Overnight Policy Rate (OPR) will likely be kept at 3.0% for 2024. A wide official inflation range of 2.0% to 3.5% should provide sufficient room against future price movements. We maintain our 2024 headline inflation projection at 3.3% YoY. We remain cautious about the potential inflation upside amid fiscal consolidation measures and elevated commodities prices. (Report). 
   

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