Global Economics & Market Strategy

Staying True to Fundamentals - Looking Past US Election Noise

19 July 2024
 

Barnabas Gan Acting Group Chief Economist & Head, Market Research

• Last week's market movement was an ideal example of how market movements can deviate from fundamentals. Market watchers were fixated on the rising Trump 2.0 probability, one single print of unexpectedly low US CPI, and a relative neglect of other indicators that may mean higher prices are still on the cards. Swap prices have already fully priced in a quarter-point rate cut at the policymakers' 18 September meeting, a view we continue not to subscribe to. Consequently, DXY has fallen below 104, as we have accurately forecasted in our previous weekly report, albeit the index quickly returned to above its 104 handle. UST 10Y yields have shown relative resilience with its return to its 4.2% handle at the time of writing. But should fundamentals prevail (they usually do), the persistent inflation signs we are seeing may mean that bets for Fed Funds Rate (FFR) cuts in September are a losing one. 
   
• Three key signs that US inflation will stay supported in 2H24 - Drivers of inflation are centred on rising crude oil prices (Figure 27), food prices (Figure 28), and base metals (Figure 29). We had been concerned about inflation since the year started, and with good reasons - we cited OPEC's optimistic view of oil demand in 2024 and 2025, with our proprietary indicators suggesting food prices are still climbing. Meanwhile, China's growth recovery in 2024 has already led base metal prices higher. Separately, oil prices have reacted higher to wildfires in Canada, the largest provider of US oil imports, which may threaten more than 400 thousand bpd of production capacity. As such, we see three signs that US inflation will stay supported in 2H24 - (1) US ex-food & ex-energy producer prices (Figure 22) surged 0.4% MoM, at a faster pace vs year-to-date average of 0.3% MoM, (2) recent US CPI, although showing slower prints, still saw higher momentum in F&B, recreation, and other G/S, while (3) demand-led inflation may persist on the back of strong June's US economic-centric data, with industrial production coming in above expectations, higher non-farm payroll numbers, and an acceleration in retail sales ex-auto & gas. 
   
• •    If we stick to fundamentals, the aforementioned discussion will mean that market bets for a September rate cut are mispriced, and the recent decline in DXY and UST 10Y yields will be temporal. Already, we are seeing some subtle signs of short-covering behaviour in the DXY and a short-term bottom in UST 10Y yields, as discussed in our first paragraph. However, we cannot discount US election noise and its impact on the global economy. In our latest Chief Economist Insights Report, we penned five scenarios we think will happen in a Trump 2.0 world. The implications for a Trump win will mean (1) a weaker dollar, (2) stronger US-centric equities, and (3) higher global inflation pressures. The rising popularity of Trump to win the 60th US Presidential Elections has already led market watchers to price in, at the very least, a weaker DXY and stronger US-centric equities. As such, while we think fundamental drivers should champion over noise, the political haze may mean DXY and UST 10Y yields stay soft with downside bias in the next week. At the same time, any disappointment in the US core PCE print may further reinforce the said trend. 
   
• In Asia, we penned a thematic report on Thailand's tourism industry, downgraded Thailand's tourism arrivals to 35.5 million persons in 2024, and kept our outlook for 41.5 million persons in 2025. Separately, Bank Indonesia kept its policy rate unchanged, as we expected. We maintain our forecast for Bank Indonesia to keep the rate unchanged at 6.25% for 2024 and anticipate three 25 bps cuts in 2025, reducing it to 5.50%. Lastly, Malaysia's export data continue to support its growth dynamics, with June's exports increased by 1.7% YoY (May: 7.3% YoY), versus market consensus of 3.3% YoY and our in-house projection of 6.5% YoY.
   

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