Economics Weekly: Soft Landing on the Cards
Global: Steepening yield curve a reflection of strong demand. The narrative of 2024 being a year of sizeable interest rate cuts, so prevalent just a few months ago, has been upended rather dramatical...
Chief Investment Office - Hong Kong22 Mar 2024
  • US: Fed keeps rate trajectory for 2024 in latest FOMC; high rates reflect strong underlying demand as seen in resilient economic data
  • Japan: BOJ ends regime of negative rates and yield curve control; impact on real economy to be limited
  • China: Emerging bottom-up recovery signs with pick up in manufacturing growth and strong external orders in the pipeline
  • India: Markets will be focused on political stability and continuation of economic reforms as the elections draw near
  • Indonesia: BI’s timing of a dovish pivot will hinge on the US rate cycle; Indonesia’s growth to stay supportive
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Global: Steepening yield curve a reflection of strong demand. The narrative of 2024 being a year of sizeable interest rate cuts, so prevalent just a few months ago, has been upended rather dramatically. A few months of sticky inflation data and growing evidence of demand resilience have pushed up yield curves around the world. The markets are not giving up on rate cuts, rather expecting them to take place later and to be fewer.


There is little apparent consternation in financial markets owing to these developments. Public and corporate debt issuances and refinancing are progressing without a hitch, stock markets are in rally-or-stable mode, volatility markers are at five-year lows, financial conditions are on the easy side, and currency markets are largely gyration-free.


The key reason for fixed income market repricing causing barely a ripple in wider markets stems from economic data. The inflation surprises so far do not reveal any supply side distortions or demand shocks. Labour markets in the US are tight, keeping services inflation high, but goods and energy prices are well-behaved, reflecting soft demand in China and ample supply/production. Even China and Europe, a laggard on the demand side relative to the US, have stopped from yielding negative dataflow. Exports have bottomed out, tourism and travel continue to thrive, and shocks from various wars and inclement weather have been absorbed remarkably well.


As long as high rates are a reflection of strong underlying demand, which in turn reflects higher rate of return on capital, the fixed income market capitulation should be seen in a constructive light. Typically, a higher-than-expected interest rate horizon would bode ill for debt holders, but if their incomes, wages, and profits are growing at the same time, then a higher debt service cost need not be a net negative. There is a delicate balance in place in this context—climbing rates, if they are countered by healthy outturns in other items in the balance sheet, can be readily absorbable.

Figure 1: Stable economic growth ahead

Source: LSEG Datastream, DBS

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