Economics Weekly: Resilient Growth Keeps Rate Cuts at Bay
Focus of the Week
Chief Investment Office - Hong Kong16 Feb 2024
  • US: January CPI inflation came in stronger than expected at 3.1%; on top of firm labour market data and businesses reporting improvements in their outlook, there is no reason for imminent or aggressive rate cuts on the horizon
  • India: Strong economic growth is allowing the RBI the room to stay on an extended pause; to facilitate greater transmission from banks, the central bank should prefer to lower the quantum of excess liquidity in the system
  • Indonesia: First-round elections win clarifies the way forward for market sand policy continuity by clearing the political fog; BI likely to extend the pause on rates and prioritise rupiah stability through maintaining rate differentials and stabilisation measures
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US: No imminent Fed cut. Having priced in a 90% chance of March rate cut in late-December, markets have swiftly shifted in the other direction over the past month, with the futures-implied probability at less than 20% presently. Between the impact of monetary policy tightening during 2022/23 and decelerating inflation (core PCE has fallen by 270 bps since its early-22 peak), expectations had grown, somewhat understandably, that policy easing was around the corner. While comforted by the inflation data, we did not join the consensus over the past few months in calling for a rate cut. Instead, our eyes were set on the remarkably resilient data on consumer demand. High interest rates and the expiration of pandemic-era support measures have not managed to dent the confidence or balance sheet of US consumers. Retail sales, with or without autos, have been robust, housing has made a comeback, services are on an upswing, and sharp rallies in stock and bond markets have boosted household net worth. Remarkably, 1Q24 Nowcast of Atlanta Fed is pointing 3-4% real growth.

Looking forward, in addition to consumer sentiment’s steady climb, businesses are also reporting an improvement in their outlook. PMI and ISM surveys show that purchasing managers have perked up in recent months. These developments suggest gathering upside to our 2024 US GDP growth forecast of 1.5%. If growth indeed heads toward 2%, it is hard for us to see how that can be consistent with c.4% long-term bond yield, suggesting that the fixed income market may have peaked. In addition to real growth outlook, another related consideration is how can such strong and resilient demand can be consistent with 2% inflation, especially if the labour market remains tight.

As expected, US CPI inflation did not slow to the 2.9% consensus in January from 3.4% in December; it came in stronger at 3.1% instead. Excluding food and energy prices, CPI Core inflation was unchanged at 3.9%, underscoring the Fed’s warning that the last mile to bring inflation to the 2% target will be challenging. On a three-month annualised basis, core services less rent is now running at a 6.5% pace. With this set of CPI numbers on top of already firm labour market numbers, there is no reason for imminent or aggressive rate cuts to be on the horizon.

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