Global Economics & Market Strategy

Economics Weekly View: Watch for Potential DXY Weakness and Lower UST 10Y Yields

05 July 2024
 

Barnabas Gan Acting Group Chief Economist & Head, Market Research

• We continue to advocate caution in further risk-taking behaviour in the short term. We turn neutral on developed market equities and prefer to long quality assets such as USTs. Our view for risk-taking appetite to see rally fatigue remains on the table – the RHB Risk Sentiment index remains choppy and, given its two-week predictive element, suggests some short-term profit-taking in US equities in the near future. Separately, the rallies in key US equities have reached their overbought zones according to the RSI indicators, suggesting that some consolidation must materialise. Notably, the neutral view we are adopting is a short-term one, and it is by no means a shift in our structural view of the global economy – key global growth indicators, including the US labour market, copper-gold ratio, and selected external data, have primarily remained resilient. We remain optimistic on global growth, with the US and China GDP to expand by 2.5% and 5.0% in 2024.
   
• Implications are for the DXY to stage a decline below its critical 105 support handle in the coming week, while UST 10Y yields could edge towards 4.2% over the same period. We expect short-term weakness in the DXY (owing to the normalisation of US-centric data amid higher pricing for a Sept FFR cut) and lower UST 10Y on the back of potential buying into quality assets. Our longer-term view, however, is unchanged for only one FFR cut in December 2024, and the return to higher DXY towards 107 and UST10Y yields above 4.5% towards the end of 3Q24. Our aforementioned view is predicated on our expectations for swap pricing to gradually price out a Sept FFR cut against the high-for-longer US rate backdrop. The caveat for this view may stem from significantly stronger nonfarm payroll (NFP) data and a faster-than-expected acceleration in US wages out tonight. 
   
• Further normalisation of US NFP data is expected into the remainder of 2024. We expect around +200K of nonfarm payrolls in June, against the consensus of +190K and May’s 272K, assuming the aforementioned normalisation trend to the long-term average growth. We see no change to the unemployment rate of 4.0%, albeit the recent pickup is a symptom of more job-seekers rather than a softening of US labour conditions. Note that the recovery in crucial US labour indicators is approaching long-term average growth rates (2011 – 2018), suggesting that the softening in US labour momentum is part of the normalisation process in the post-COVID environment. Long-term (2011 – 2018) averages of US NFP gains were around 1.6% annually, against 2023’s average gain of 2.3% and 2024 year-to-date average gain of 1.8%. US nonfarm payrolls have added 28.1 million jobs since the COVID-19 trough, against the loss of 21.4 million jobs during the pandemic.
   
• The normalisation in selected US data is not accompanied by Asia-centric ones, specifically China. China’s high-frequency growth numbers have been moving from strength to strength since 2023 – Caixin PMI composite and services remained above the expansionary 50.0 line in June. May’s exports surged 7.6% YoY against a consensus of 5.7%, while retail sales growth accelerated to 3.7% YoY (from the prior 2.3% YoY) in the same month. The only concern, perhaps, is the persistent decline in property valuations, whereby new and home prices have clocked -0.7% and -1.0% in May, respectively. In the coming week, critical ASEAN data, including ID and TH’s consumer confidence, SG’s 2Q24 Advance GDP, and MA’s industrial production, could continue to support positive investor sentiment in Asia. 
   
• Global inflation concerns will continue to rear its ugly head. Brent prices have rallied to near its US$88.0/bbl handle due to the warning on Hurricane Beryl and shrinking US crude stockpiles. Copper prices also staged a substantial uptick last week to US$4.57/lb, the highest in a month. Consensus is pencilling US average hourly wages to rise 0.3% MoM despite an expected higher labour participation rate in June. Similarly, Fed minutes cited that policymakers need more evidence for inflation to be sustainably cooling before cutting its benchmark rate. 
   

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.