14 June 2024
Weekly Market View
Policy turning too tight?
US disinflation continues, but the Fed remains cautious about cutting rates until it sees further signs of easing prices.
We believe the Fed is being cautious lest it loosens financial conditions prematurely. We expect disinflation to continue over the coming months as official shelter inflation catches up with already declining market rents.
Sustained disinflation would make US policy too tight, likely leading the Fed to start cutting rates in H2 as it turns its focus towards supporting growth.
Combined with a robust outlook for US corporate earnings and strong technicals, Fed rate cuts are likely to support US equity outperformance, especially the technology and communication services sectors vs. global equities this year.
Meanwhile, the Bank of Japan delayed a decision to reduce bond purchases to next month. USD/JPY could test 160 in the coming days.
What are the market implications of EU tariffs on China electric vehicles?
What are the implications of the recent slowdown in the PBoC’s gold buying?
What is the JPY and GBP outlook around their central bank meetings?
Charts of the week: Is the Fed too cautious?
We expect the Fed to cut its policy rate in H2 24 as the monetary policy turns too tight amid continued disinflation
Fed rate; US core and supercore* inflation, 3m annualised
Consensus 2024 earnings estimates for US and key sectors#
Source: FactSet, Bloomberg, Standard Chartered; Dotted line = Fed inflation target; *core services ex-housing; #rebased to 100 = 31 Dec 2023
Editorial
Policy turning too tight?
US disinflation continues, but the Fed remains cautious about cutting rates until it sees further signs of easing price pressures – that is the key message over the past week. We believe the Fed is being cautious lest it loosens financial conditions prematurely. We expect disinflation to continue over the coming months as official shelter inflation catches up with already declining market rents. Sustained disinflation would make US policy too tight, likely leading the Fed to start cutting rates in H2 as it turns its focus towards supporting growth. Combined with a robust outlook for US corporate earnings and strong technicals, Fed rate cuts are likely to support US equity outperformance vs. global equities in the coming months.
Cooling inflation: Latest data for May showed US inflation cooled for the second straight month. US headline inflation was unchanged m/m, while core inflation cooled for the second straight month to 0.2% m/m, falling short of estimated 0.3%. The so-called ‘supercore’ inflation (core services ex-shelter) contracted (-0.1% m/m) for the first time in over three years.
The data highlights that, barring shelter inflation which remains sticky (0.4% m/m), broader inflation is slowing again after a brief upturn at the start of the year. The two other sticky components of services inflation, medical care services and auto insurance, also slowed in May. Falling market rents suggest shelter inflation is likely to decline in H2, while falling new and used car prices point to further declines in auto insurance and repair costs. Also, forward-looking labour market indicators (declining job vacancy, hiring and quits rates) point to continued deceleration in ‘supercore’ inflation in the coming months, given wages are a key component of the latter.
Cautious Fed: Fed Chair Powell, after leaving interest rates unchanged at the latest policy meeting, acknowledged the two straight months of softer-than-expected inflation data, but
added that annual inflation (core CPI inflation in May: 3.4% y/y) “remains too high.” As a result, the Fed, in its June forecast update, reduced its median projected rate cuts for this year to just one cut, compared with three cuts anticipated in March, and raised its inflation estimates for 2024 and 2025.
Powell said Fed policymakers need “greater confidence” that inflation remains on a downtrend before it eases policy. We believe the Fed is being cautious about communicating a dovish signal early, lest it repeats its ‘mistake’ late last year when a dovish signal led to a significant easing of financial conditions, thus defeating the Fed’s primary objective of cooling growth and inflation. Nevertheless, Fed policy is likely turning too tight as disinflation continues. There was a near-even split among the Fed members voting for two rate cuts this year (eight members) and one cut (seven members), with four members voting for no changes this year. We believe a few more months of 0.2% m/m or lower core inflation could sway more Fed policymakers towards one or more rate cuts this year.
Investment implications: The latest US inflation data sustains the economic soft-landing thesis wherein growth and inflation continue to moderate, which is positive for risk assets. We believe improving US corporate earnings estimates, especially for US technology and communications services, is likely to continue driving US equity outperformance vs the rest of the world, especially if the Fed starts to cut rates. Our quantitative and technical models remain upbeat on global and US equities.
Implications of BoJ decision: The Bank of Japan (BoJ) held its benchmark rate in the 0.0-0.1% range, as expected, and said it would decide on cutting bond purchases at the next policy meeting in July. USD/JPY rose to a six-week high and Japanese government bond yields fell as markets were expecting a decision on reducing bond purchases at this meeting. USD/JPY could test 160 in the coming days, if it breaks above the near-term resistance at 158 (see page 5).
The weekly macro balance sheet
Our weekly net assessment: On balance, we see the past week’s data and policy as neutral for risk assets in the near term
(+) factor: Cooling US inflation, robust US labour market, China exports
(-) factor: Hawkish Fed, political uncertainty in France
Fed policymakers now expect only one rate cut this year, instead of three cuts projected in March, as they revised inflation forecasts higher
Fed’s June vs March economic and rate projections
Euro area investor confidence continued to improve, rising above the neutral level amid an improving near-term growth outlook
Euro area Sentix Investor Confidence index
China’s deflationary pressures continued despite a pick-up in exports
China’s consumer and producer price inflation and exports growth
Top client questions
What are the market implications of EU tariffs on China electric vehicles?
Following the US announcement of higher tariffs on Chinese electric vehicle (EV) imports last month, the EU said it would impose additional tariffs on Chinese EV imports. Preliminary tariffs range from 17.4% to 38.1% on top of the existing 10.0% duties, which will come into effect from 4 July 2024.
However, we expect the impact on China’s consumer discretionary sector to be limited, given the relatively small share of EVs within the sector and the ongoing gradual increase in demand across the wider sector. We also believe the competitiveness of Chinese EVs in Europe should remain stable given their pricing strategies.
Having said that, the measures are likely to contribute to a further rise in geopolitical tensions between China and the West. We believe China is likely to retaliate against these European tariffs by imposing tariffs on cars imported from the EU. The US Presidential elections could also raise the risk of further disputes. Hence, we remain Neutral on Chinese equities within Asia-ex-Japan.
— Jason Wong, Equity Analyst
Chinese EV exports to Europe have been growing in recent years
Chinese EV exports in USD mn
What are the implications of the recent slowdown in the PBoC’s gold buying?
China’s central bank significantly slowed its rate of gold purchases in May this year. This follows a gradual slowdown in purchases since H2 23 – the average monthly addition was 26 tonnes in Q3 23, which fell to 15 tonnes in Q4 23 and just 1 tonne this quarter. China’s central bank demand remains key for gold, given it accounted for almost half of global net purchases over the last 18 months.
We previously highlighted that elevated prices would dampen central bank demand in the short term, slowing the pace of gold price gains. An analysis of PBoC’s past purchases reveals that they similarly tapered off after previous price gains. In our view, this illustrates the PBoC’s price sensitivity.
That said, it is likely China’s central bank demand will return. In 2016, purchases paused for one month before they resumed. Moreover, the share of gold in China’s total reserves is only around 5%, despite the recent round of buying. That is still significantly below the double-digit percentage allocation of other major central banks. Hence, we continue to expect prices to be rangebound, with USD 2,200/oz being a key technical support level.
— Zhong Liang Han, CFA, Investment Strategist
Chinese central bank gold purchases historically tapered when prices surged
Gold price, China net gold additions
Top client questions (cont’d)
What is the JPY and GBP outlook around their central bank meetings?
The BoJ left policy rates unchanged at its latest meeting while stating it will set out plans for reducing the amount of its bond buying at its July meeting. However, the previous reduction in JGB purchases on 13 May did not lead to any sustainable JPY appreciation. The latest meeting also failed to boost market expectations for future hikes. Therefore, we still see interest rates differentials favouring the ‘JPY carry trade’ for now i.e., using the JPY as a borrowing currency to buy higher yielding currencies. Technical resistance for USD/JPY remains at 160.
Meanwhile, UK economic data remains mixed, with GDP growth slowing modestly in April, wage growth remaining at a four-month high and manufacturing PMI reaching expansion in May. The UK retail sales growth in May also points to consumption resilience and the likelihood of sticky inflation, supporting a further delay to the start of the BoE cutting cycle compared to the ECB. Markets expect the BoE to leave rates unchanged this month and cut by 25bps by November.
We see GBP/USD as rangebound between 1.2640 and 1.2890 ahead of the BoE meeting next week. The outcome of the upcoming UK election is likely to provide some support to the GBP in the coming months. Opinion polls suggest the Labour party is expected to win the election in July. A Labour party win is likely to lead FX markets to price in closer ties with the Euro area in the medium to longer term. This likely exposes the EUR/GBP to further downside towards 0.8390.
— Iris Yuen, Investment Strategist
The JPY has weakened sharply against most major currencies, supporting the so-called ‘carry trade’
JPY vs. major currencies; Year-to-date performance
Market performance summary*
Our 12-month asset class views at a glance
Economic and market calendar
The S&P 500 has next interim resistance at 5,523
Technical indicators for key markets as on 13 June close
Investor diversity remains healthy across asset classes
Our proprietary market diversity indicators as of 13 June close
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