Global Economics & Market Strategy

Economics Weekly View: Markets Will Be Disappointed When September Comes

14 June 2024
 

Barnabas Gan Acting Group Chief Economist & Head, Market Research

• We believe the market is still mispricing the extent of US Fed Funds Rate cuts in 2H24. Swap pricing, at the time of writing, is still pencilling a >50% FFR cut in September, an expectation we think the market will be sorely disappointed towards the end of Summer. Our global macroeconomic views, so far, have materialised very well. We expected US and China to see above-consensus GDP growth rates at 2.5% and 5.0%, respectively, whereby market forecasts are gradually moving towards our expectations. Meanwhile, we were guided by our global inflation trackers and were convinced that inflation would persist in 2024. More pertinently, based on our global economic assumptions, we had been telegraphing since early this year, we telegraphed that the US FFR will only see one rate cut by end-year, with the balance of risks tilted towards no rate cuts. 
   
• Our inflation trackers suggest US core PCE inflation is on a path towards 3.0% by end-year, on the assumption that MoM % trends realistically around current levels. We believe the inflation trend seen from now to end-year is for US prices to move towards 3.0%, rather than the Fed’s objective of 2.0%. What this means to us is that (1) there is a real and rising possibility for the US Federal Reserve to leave its FFR unchanged for the whole year at 5.25 – 5.50%, while (2) high interest rates even at these levels, have not materially dented consumer appetite and labour conditions and (3) and suggest that inflation will likely stay high on the back of a tight US labour market and resilient consumer demand. We observe the slowdown in May’s inflation pressures to 3.3% YoY (from the prior 3.4% YoY) is not accompanied by a similar decline in real average hourly earnings, which accelerated to 0.8% YoY (from the prior 0.5% YoY), suggesting that US consumer spending may continue to be a key driver for demand-pull inflation. 
   
• We hear three things have meant in its latest statement. First, policymakers have implicitly raised its nominal GDP forecasts by keeping its real GDP projections at 2.0 – 2.1% in 2024 – 2025 and increasing their PCE inflation targets to 2.3 – 2.6% (from 2.2 – 2.4%) over the same period. Second, Fed officials are relatively more hawkish than before, with FOMC chair Powell citing “the (inflation) data have not given us that greater confidence” while four members, as reflected in the latest dot-plot chart, signalled for no change in FFR (versus the prior two). Third, US policymakers, in citing core PCE inflation to average at 2.8% in 2024, suggest that the Fed’s preferred inflation indicator has to slow towards 0.1% MoM % from the current 0.25% MoM in April, albeit this is a view that we do not subscribe to as aforementioned discussed – we think US core PCE inflation will accelerate towards 3.0% YoY towards end-year. 
   
• With the latest FOMC statement and dot-plot chart, we continue to expect DXY to rally towards 107 in 3Q24 while we continue to see upside bias for US 10Y bond yields over the same period. Current UST 10Y yields at around 4.3% is likely a function of the swap (mis)pricing of two FFR cuts, underlining upside bias of around 25 – 50bps when market players eventually price out FFR cuts towards year-end. Importantly, market risk appetite did not slow despite the Fed’s revised dot-plot chart, thus reinforcing our overweight view for equities, market-weight bonds and underweight cash. We remain bullish on ASEAN’s external environment in 3Q24, on assumptions for US and China growth to accelerate further in the same period.
   
• The latest ASEAN data has been relatively positive - we maintain our optimistic view of Malaysia’s manufacturing sector, underpinned by (1) a rosier global and domestic economic landscape, (2) a global technology upcycle and (3) an improvement in investment appetite. Elsewhere, on the back of a relatively supported consumer demand and a gradual uptick in inflation, we keep our forecast for the Bank of Thailand (BoT) to maintain its benchmark rate at 2.50% for 2024.
   

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