Economics Weekly: Inflation and Growth Concerns Deepen
US: Weaker-than-expected growth while inflation stays hot.The miss in US 1Q GDP growth (actual: 1.6% q/q saar, consensus: 2.5%) masks underlying economic strength. However, the key drags were from in...
Chief Investment Office - Hong Kong26 Apr 2024
  • US: 1Q GDP growth misses estimates but inflation rose at the fastest pace in a year, pointing towards a higher-for-longer narrative
  • Hong Kong: Consumer price growth expected to slow amid weak consumer spending; higher-for-longer rates to bring further economic headwinds
  • Indonesia: BI hikes the 7D policy rate by 25 bps to 6.25%, in line with our off-consensus call; we view this as a move to instil confidence and build higher real rate support for IDR
  • ASEAN: Maintain optimism on the region given continued rebound in tourism; supported by concerted efforts to continue attracting visitors
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US: Weaker-than-expected growth while inflation stays hot.The miss in US 1Q GDP growth (actual: 1.6% q/q saar, consensus: 2.5%) masks underlying economic strength. However, the key drags were from inventories (-0.35 %pt) and net exports (-0.86 %pt), both of which can be attributed to firm domestic demand. In any case, final sales to private domestic purchases, which provides a cleaner read of private sector demand, came in at 3.1% q/q saar, firm by any measure. With the core personal consumption expenditures (PCE) price index also rising by 3.7% q/q saar (consensus: 3.4%), data is pointing towards an economy that is still hot. US Treasury yields out to the 10Y tenor level shifted higher by around 6-7 bps on the day.

We think that market participants are starting to take the no-landing view more seriously. In the front of the curve, 2Y yields closed at 5% as the market pushes back the first cut pricing out to the end of the year. Further out, as it becomes increasingly clear that a dovish pivot is not plausible, higher-for-longer is becoming more appropriately priced into the belly and back of the UST curve. We note that our 10Y yield target of 4.75% for 2Q is within sight and reiterate the 4.5-5.0% range as appropriate for a firm US economy.

Facing the steady extension of elevated rates, a key concern is the commercial real estate (CRE) sector, where real prices have declined by 12% globally over the past year. The distress in the sector is a function of factors that are both cyclical and structural. This weakness is most pronounced in the US and Europe. A wide range of risk metrics suggests that banks are well-positioned to absorb CRE losses, Nonetheless, certain countries may experience more strains given that their banks hold large amounts of CRE loans, especially if demand remains weak.

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