Global Rates: Watching downside risks to US economy; Monetary policy convergence


Watching downside risks. Monetary policy convergence.
Group Research, Eugene Leow25 May 2022
    Photo credit: Unsplash Photo


    Market participants are shifting focus towards downside risks to the economy. Since the start of the year, the focus has been largely on US inflation and the rapid catchup of Fed hike pricing. At this point, with short rates factoring a terminal of close to 3% for the Fed, it is difficult to argue that USD rates are clearly too low. Moreover, there has been increasing concerns on the US economy and these worries are starting to overshadow inflation worries. Last night’s weakness in new home sales (actual: 591k, consensus: 748k) marked the first clear sign that higher rates are restraining the US economy. This shift has been capping longer-term USD rates even as the Fed has not shifted on its hawkish rhetoric. We might well be past peak inflation / duration fear for the US. Current USD rates are probably a tad low and could grind higher when sentiment improves, and recession fears recede. However, we do think that the bulk of the adjustment higher may be done and a further grind higher may not be as damaging for sentiment. The upshot is we have turned more cautious on the US and are on the watch for downside risks. While we doubt that the Fed would be deterred from hiking in the coming two quarters, if data weakens materially in subsequent quarters, the runway for tightening may get shortened (resulting in a lower terminal rate than we currently expect). 

    There has also been a shift in focus from Fed tightening to other central banks tightening. Note that this has been the case even as the Fed was not the quickest amongst the G10, the RBNZ and the BOE were ahead of the Fed. Notably, attention is shifting to the ECB, which has hinted that an exit from negative rates may be on the cards as soon as 3Q, and the RBA, which just kick offed with a rate hike in early May. This might mean that the interest rates differential between the US and the laggards (in terms of policy normalization) will narrow going forward. Policy convergence in the DM space is accelerating with many central banks communicating / or embarking on tightening. Only the BOJ remains clearly dovish. Policy convergence towards tightening is also more apparent across EM / Asia where there is an increasing impetus to accelerate tightening. China remains the exception as it took more aggressive steps (cutting the 5Y LPR) to cushion the economy.


    Eugene Leow

    Senior Rates Strategist - G3 & Asia
    [email protected]
     
    Subscribe here to receive our economics & macro strategy materials.
    To unsubscribe, please click here.

    The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation. 

    This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at [email protected] for matters arising from, or in connection with the report.

    DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-878-9999. Company Registration No. 196800306E. 

    DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

    DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.