In today’s briefing:
- USDJPY Disconnect
- Un-Real Neutral Rate Views
- Fed Policy Outlook: Markets Face a Summer Tug of War Between Inflation and Growth Fears
- Cambodia and Myanmar Race to Become the Next Apparel Manufacturing Hub
USDJPY Disconnect
- The slip in US yields has lead the US_Japan yield spread to move lower thereby putting USDJPY out of line with it
- The danger is that once month end is over, USDJPY may “catch up” by trending down in the short term
- In addition we see price action developments on USDJPY itself that reflects weakness in the uptrend
Un-Real Neutral Rate Views
- Neutral rates still appear to have risen beyond reversing the covid-related crash. That makes policy more stimulative, pushing further tightening.
- Adding inflation to “real” neutral estimates exaggerates the problem. Rates need not rise above inflation to lower it, as it is effective expectations that matter.
- Mistaken fundamental views of neutrality encourage markets to price a possibility of spuriously high rates, contributing to excessive pricing (a probability-weighted mean).
Fed Policy Outlook: Markets Face a Summer Tug of War Between Inflation and Growth Fears
- Changes to the Fed’s forward guidance will depend on incoming economic data over the summer. The Fed will only change policy stance once a return to price stability is achieved.
- 30-Year fixed mortgage rates will probably breach 6% if the Fed retains a hawkish bias, particularly as quantitative tightening accelerates. The Fed will not be overly-concerned by cooler downstream activity.
- Markets may be disappointed by the Fed’s reaction to economic weakness, but elevated inflation makes easing policy impossible. US equities have corrected, but are vulnerable to revised corporate profits expectations.
Cambodia and Myanmar Race to Become the Next Apparel Manufacturing Hub
- From October 2021 to March 2022, China lost around 5% of its textile export orders, 7% of its furniture and 2% of its mechanical and electrical export orders from the United States to the 10-member Association of Southeast Asian Nations (ASEAN), especially Vietnam
- A shift of factories away from China has been underway for years as China’s labor costs rise. Countries in Southeast Asia and South Asia such as Vietnam and India have become the top alternatives for their abundant and cheap labor forces
- The relocation has been driven by lower costs and the trade war between China and the United States
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