Global Economics & Market Strategy

Economics Weekly View: FFR Cuts are Becoming Less of a Reality

12 April 2024
 

Barnabas Gan Acting Group Chief Economist & Head, Market Research

• Our revision of the US inflation model suggests US PCE core inflation will not touch 2.0% by the end of 2024, even on the assumption that month-on-month prints decelerate gradually towards 0.1% henceforth (see Figures 26 and 27). We keep US full-year headline inflation at 3.0%, with upside risks towards 3.2%, thus suggesting that inflation will continue to persist in the year ahead. The latest Fedspeak by NY President John Williams suggests “no clear need to adjust policy in the very near term”, as inflation still has “a ways to go” to reach the Fed’s 2.0% goal.
   
• With core PCE inflation likely not touching 2.0% anytime soon, we think that inflation is likely not on the path towards the Fed’s goal in 2024. Our model (Figure 27) suggests that (1) US core PCE inflation will head towards 3.4% (from the current 2.8%) if MoM % is unchanged at February’s 0.3% handle, and (2) should it accelerate to 0.4%, core PCE inflation will head up to 4.2% by year-end. Our view for higher commodity prices into the year, telegraphed as early as 2H23, remains unchanged. As such, global inflation is likely to be persistent, rather than a blip, on the back of (1) energy supply constraints by OPEC+, (2) poor weather conditions given the El Nino conditions, and (3) demand-led prices on the back of our above-consensus GDP forecasts in key markets.
   
• We keep our base case for two Fed Fund Rates (FFR) cuts in 2H24 (specifically in September and December by 25bps each). Since the start of the year, we have been ahead of market expectations for (1) dollar strength, (2) higher US 10Y yields, and (3) high-for-longer FFR, which had played out very well for us. At this juncture, our models suggest a material risk for only one FFR cut (or no cuts) in 2024, assuming that global inflation remains persistent in the year ahead. We keep our Brent crude forecast to head towards US$95 per barrel in 2H24, while FAO food prices have rallied the fastest amongst Brent and LME Metals since February 2024 (See Figure 1). In ASEAN, we observe an uptick in import prices, with inflation heating up in economies without sizeable food subsidies (e.g. Singapore, whereby we upgraded core CPI to 3.5% in 2024). Note that swap pricings now indicate only two cuts by year-end, whereby markets may continue to price out rate cuts should global inflation stay hot. 
   
• The implications are as follows: we keep our DXY forecast at a range of 105 – 110 in 2Q24, and US 10Y yields to head towards 4.6% in the same period, as cited in our latest Pathfinder 2Q24 report. We remain optimistic about global economic momentum, with US and China growth pencilled at an above-consensus level of 2.5% and 5.0%, respectively. The relatively stronger DXY expected into 2Q24 will mean a weaker ASEAN FX spectrum, albeit SGD will likely remain the outperformer in ASEAN given its S$NEER appreciation policy. We keep our MYR outlook to weaken towards 4.8 per USD in 2Q24. 
   
• Closer to home, we maintain our optimistic view of the manufacturing sector on the back of a rosier trade outlook. We observe an improving momentum in Malaysia’s IP year-to-date, even as February’s IPI printed 3.1% YoY (January: 4.3% YoY), stronger than our in-house estimate of 2.1% YoY and Bloomberg consensus estimate of 1.8% YoY. Elsewhere, the Monetary Authority of Singapore kept its policy parameters unchanged in line with our expectations. We maintain our outlook for no change in SG’s policy stance for the year ahead. 

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