In today’s briefing:
- FOMC Acknowledges Its Policy Error and Will Front-Load Rate Hikes
- US Inflation and Asia: A Regime Change in Asset Pricing Looms Large Amid Higher-For-Longer Yields
- Supply-Chain Reconfiguration: Acceleration And Not Exodus Of Production Relocation Out Of China
- Taiwan: Export Orders and Border Re-Opening Are Green-Shoots For Growth
FOMC Acknowledges Its Policy Error and Will Front-Load Rate Hikes
- FOMC raised the FF rate by 75bp for the third consecutive time, taking it to 3-3.25% as expected. We expect the Fed Funds rate to peak at 5% in Mar’23.
- The more aggressive monetary tightening by the US (outlined in the SER) will likely bring forward the US recession to Q2CY23 (two quarters ahead of our previous forecast).
- USD will continue to strengthen, weakening the prospects for emerging markets. India, Indonesia, Vietnam will be safe havens, and Japan will continue riding the weak Yen. Avoid EM-creditor China.
US Inflation and Asia: A Regime Change in Asset Pricing Looms Large Amid Higher-For-Longer Yields
- The Fed is expecting a terminal rate of 4.6% in 2023, which suggests that it is willing to risk over-tightening. Near-term, that has two implications for Asia.
- Dollar strength will persist beyond what we had expected, with added strains on Asian currencies and on central banks to raise rates more aggressively.
- That policy tightening will translate into a higher cost of capital that will weigh on US capital spending, and therefore on demand for Asian exports.
Supply-Chain Reconfiguration: Acceleration And Not Exodus Of Production Relocation Out Of China
- Production relocation from China is accelerating. But our baseline scenario is a diversification of production locations by international manufacturers, not an exodus of production from China.
- Continued offshoring to other low-cost economies, near-shoring, and re-shoring are the main production relocation strategies for firms. Friend-shoring is an emerging alternative.
- Firms are unlikely to have a preferred relocation strategy. Rather, production relocation decisions will be made based on the specific needs of a business.
Taiwan: Export Orders and Border Re-Opening Are Green-Shoots For Growth
- Taiwan’s economy has been bolstered by export orders, industrial production and bolder border reopening.
- While export orders from China has been a drag, orders from the US, ASEAN and Europe have held up admirably, despite the formidable headwinds.
- The government’s plans to further loosen covid restrictions will probably help to boost the economy with the introduction of the visa-free travel for foreign tourists.
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