In today’s briefing:
- Is a Major RMB Depreciation on the Cards?
- The Stock Market’s Q2 Challenges
- Secondary Indicators of Fed Policy Do Not Indicate Overly-Restrictive Stance
- Spotlighting “Underlying” Inflation
- Why the First Fed Rate Cut Will Be Later Than June
Is a Major RMB Depreciation on the Cards?
- Further weakness in the JPY poses a risk to RMB stability
- If major stimulus is unleashed in China, it is likely the RMB will weaken
- Continued incremental easing will benefit the economy in the long term but may disapoint equity investors looking for a quick fix despite Chinese data improving
The Stock Market’s Q2 Challenges
- The S&P 500 ended the quarter exhibiting a series of “good overbought” conditions which are signals of strong momentum. Can the bullish momentum continue?
- Equity price momentum in Q2 is dependent on continued rising EPS estimates, a tame bond market response to higher Treasury coupon issuance, and a possible liquidity squeeze.
- The market is vulnerable to a setback. A lot has to go right.
Secondary Indicators of Fed Policy Do Not Indicate Overly-Restrictive Stance
- Fed Chairman Powell’s assessment that monetary conditions are restrictive is questionable due to issues surrounding the neutral federal funds rate. Secondary signals of the Fed’s policy stance are worth following.
- Commodity and risky asset price trends, exchange rate movements and yield curve changes are viewed as secondary indicators of the Fed’s policy stance.
- Policy is not tight based on commodity and risky asset prices. Exchange rate movements are inconclusive. Yield curve inversion is associated with tight money, but this condition no longer holds.
Spotlighting “Underlying” Inflation
- The incoming inflation data has received more attention and scrutiny as G3 (Fed, BoJ and ECB) policymakers up the ante
- Ideally, the emphasis should be on “trend” or “underlying” inflation, not the monthly data wiggles
- My estimate of the G3 underlying inflation rate is currently hovering around 1.5%-points above the pre-pandemic average
Why the First Fed Rate Cut Will Be Later Than June
- We believe the market hasn’t discounted Powell’s political need for unanimity for the first decision to cut rates in an election year.
- Current consensus expectations call for the first quarter-point rate cut at the June FOMC meeting, which is probably a stretch for FOMC members.
- It will be difficult to form a consensus for a June cut in the absence of either lower inflation data or weakness in the labour market.
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