Global Economics & Market Strategy

Economics Weekly View: The Key is For Inflation To Move Down “Sustainably”, Too Early to Tell

12 July 2024
 

Barnabas Gan Acting Group Chief Economist & Head, Market Research

• We are heartened by the early signs of slower US inflation. On the assumption that US CPI (ex-food & ex-energy) trends largely in line with US core PCE inflation, last night’s US inflation print does give rise for the latter to trend towards 2.0%. Our US inflation updated model is now pencilling a year-end core PCE YoY print of 2.0%, on assumption that sequential price growth averages around 0.1% MoM for the rest of this year. This is an important data point, as (1) FOMC guidance has been very clear that the move towards the 2.0% inflation objective is a “sacred vow”, albeit (2) there must be confidence for prices to move sustainably towards the said objective before rates will be reduced. In the same vein, our view for a short-term pull back in risk appetite in the last two weeks did not materialise, given the faster-than-expected slowdown in US-centric consumer prices. 
   
• We think it is still too early to tell if US inflation is moving “sustainably” towards 2.0%, and neither should one isolated data point in June be relied on to conclude an earlier-than-expected US Funds Rate (FFR) cut. Other data does not support a sustainable decline in US inflation, owing to (1) the acceleration in US real average earnings in June, amid (2) the continued resiliency in US labour data. We note that US wages are an important driver for overall demand-led inflation, thus the acceleration of US real average hourly wages to June’s +0.8% YoY from May’s +0.7% YoY is seen in tandem with the above-consensus print in US nonfarm payrolls (June: +206K, consensus: +190K) and lower jobless claims for the week ending 6 June (222K persons, against previous week 239K). Suffice it to say, we need US core PCE inflation to move sustainably towards 2.0%, and thus, further slowdown of US price momentum to around 0.1% MoM is required especially in July to September, before we are convinced for a September FFR cut. 
   
• Our base case is still for one rate cut by December 2024, considering that (1) other indicators still reflect a relatively elevated inflation prognosis while (2) time is needed before we can conclude that the current price downtick is a sustainable one. We think that the balance of risks is magnified more towards a November rate cut instead; a September rate cut may only occur if US core PCE inflation prints between 0.0 – 0.1% MoM in July to September. A November cut (instead of a September should inflation slow as discussed above) should we take a leaf from Fed Chair Powell’s recent comment for “taking our time to get it right” (see our FX report – 3 July 2024). We admit that things are appearing slightly more fluid now, and thus, DXY may continue to trend below 104 while UST10Y yields to stay below 4.5% may persist till further clarity on the US-centric trajectory is observed. Note that the market cheered on the recent slowdown in US inflation. Swap pricing is now pencilling a 93.5% probability for a September FFR cut, and a 58.5% and 82.4% chance for a November and December FFR cut, respectively. DXY softened to below 105 as per our expectations cited in our previous weekly report, whereby we think it may now persist below the aforementioned 105 level as long as the market is pricing in the September FFR cut. Meanwhile, UST 10Y yields also dived 4.2% before recovering to current 4.21% at the time of writing. 
   
• In other ASEAN-centric news, Singapore’s GDP printed in line with our forecast (above market consensus) at 2.9% YoY (+0.04% QoQ SA), as indicated by our proprietary GDP leading index model which leads SG GDP by two quarters. Closer to home, we maintain our view that the Overnight Policy Rate (OPR) to remain unchanged at 3.00% for 2024, whereby we think policymakers might hold the OPR rate while assessing the lagged impact of fiscal policy changes on the overall inflationary trajectory and economic momentum. With Malaysia assuming ASEAN’s chairmanship in 2025, we pen our thoughts and potential policy implications in our recent thematic report. 
   

Please note that the reports published by the Economics and Market Strategy or any division within RHB Bank Berhad and/or its subsidiaries, related companies and affiliates, as applicable (“RHB”) are compiled from data considered to be reliable at the time of writing, but RHB does not make any representation or warranty, express or implied, as to its suitability, accuracy, completeness or correctness. Neither the reports, nor any opinions expressed therein, should be construed as an offer to sell or a solicitation of an offer to acquire any securities or financial instruments mentioned therein. RHB (including its officers, directors, associates, connected parties, and/or employees) accepts no liability whatsoever for any direct or consequential loss arising from the use of the reports or any contents therein. The reports may not be reproduced, distributed or published for any purpose without prior consent of RHB and RHB (including its officers, directors, associates, connected parties, and/or employees) accepts no liability whatsoever for the actions of third parties in this respect. By accessing the reports, you agree to the disclaimer herein and the section on ‘’Disclaimer Economics and Market Strategy’’ and/or any other disclaimer in the reports.