In today’s briefing:
- Non-Consensus Forecast: No Fed Rate Cut This Year
- Response to Premier Li: Post COVID Chinese Economy
- QE With Chinese Characteristics: What It Will Look Like.
- China Economics: Expect Few Changes in Third Plenum
- Regional Economics: In A Stormier World, Can Asia’s Ship Remain Steady?
- US: Receding Inflation Has Put 3 Rate Cuts Back in Play for 2024
- Great Game – Biden in Free-Fall and a French Ménage À Trois
- Euro area Unemployment Rate 6.4% (consensus 6.4) in May-24
- EA: ECB Not Yet Stuck By Service Prices
Non-Consensus Forecast: No Fed Rate Cut This Year
- We are against the majority opinion that Fed will cut rate in September meeting. Also majority forecast there will be 1-2 rate cuts this year but we forecast none.
- CORE PCE Price Index has been treading above 2% target, though it is on a decreasing trend two streaks on a roll and since Jan 2023.
- We believe instead of targeting at the static CORE PCE Index for one data point, the Fed will consider a dynamic series of data points, known as cumulative inflation targeting.
Response to Premier Li: Post COVID Chinese Economy
- In a recent forum, Chinese Premier Li Qiang is confident that Chinese economy was stagnant simply because of COVID. Now that COVID has gone, Chinese economy will eventually heal itself.
- We believe rather Chinese economy will still be bumpy after COVID, with three major arrows against Chinese Economy, namely property sector slump, local government debt, and weak private sector.
- Instead of the “self recovery” view of the economy proposed by Li, we believe government should more actively roll out fiscal and monetary stimulus.
QE With Chinese Characteristics: What It Will Look Like.
- PBOC announced that it will borrow and trade treasury bonds from primary markets.
- The central bank will use Open Market Operations to not only control and steepen the yield curve, but also improve market liquidity.
- Last week the 50-year bond dropped below the 2.5% yield which was the minimal threshold the PBOC indicated before defense.
China Economics: Expect Few Changes in Third Plenum
- China’s latest consumer data will do little to convince the leadership to significantly step stimulus in the upcoming Third Plenum as support for advanced sectors remains key.
- Beijing’s refraining from significant stimulus is deemed a feature, rather than a bug. Policymakers do not yet view the trade-offs as unmanageable.
- While some incremental step-up in policy support may be on the cards, do not expect Beijing to rock the boat beyond that.
Regional Economics: In A Stormier World, Can Asia’s Ship Remain Steady?
- While global economic conditions have been “so far so good”, there are signs of trouble that, while manageable for now, could darken the outlook if they spiral out of control.
- On the upside, conditions in major markets such as the US and China are stabilizing, while global capital spending and technology cycles should be favourable for Asia.
- While the risks are growing, resilient domestic demand and appropriate macroeconomic management should shield Asian markets from the worst of the downsides.
US: Receding Inflation Has Put 3 Rate Cuts Back in Play for 2024
- After a 0.99%MoM annualised rise in May’24, core PCE inflation eased to 2.57%YoY — lower than the 2.6%YoY end-CY24 projection that the FOMC believed was compatible with 3 rate cuts.
- While the FOMC initially signalled QT in Jun’22, base money increased each month during Jul’23-Feb’24, contributing to higher inflation. Contracting base money since Mar’24 was key to moderating MoM inflation.
- Core PCE will likely rise 2%QoQ (annualised) in Q2CY24, and 2.5%YoY in Jun’24. The release of those numbers six days before FOMC decision (31/7/24) will likely trigger Jul’24 rate cut.
Great Game – Biden in Free-Fall and a French Ménage À Trois
- Hello and welcome to this week’s Great Game.
- The First Round of the French Legislative Election was held on Sunday and the initial results suggested a clear win for Marine Le Pen’s far-right coalition around her National Rally party
- Biden is starting to drop rapidly in polls after the US presidential debate.
Euro area Unemployment Rate 6.4% (consensus 6.4) in May-24
- The Euro area unemployment rate stayed at 6.4% in May 2024, indicating a stable labour market as it is below long-run and one-year averages.
- Economic indicators showed moderate GDP and employment growth, reflecting a cautious sentiment in the market.
- Services sector is expanding while the manufacturing sector is contracting, suggesting sector-specific challenges and potential inflationary pressures.
This content is sourced through publicly available sources and has been machine generated. Information displayed is for general informational purposes only.
EA: ECB Not Yet Stuck By Service Prices
- EA inflation matched consensus expectations of 2.5% y-o-y in June despite German softness as a Benelux surge offset it, with the outcome 6bps above our forecast.
- Services inflation was responsible for the upside again, as it was worryingly stuck at 4.1%, suggesting there has been no underlying progress in the past several months.
- The stability of headline outcomes to past expectations reassures the ECB, keeping September alive for another cut, assuming its peers deliver on their bias to start soon.
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