A report by CYS Global Remit Payment Service Support Team
Treasury Yields Rally | skip to SGD/CNY
After U.S. Federal Reserve Governor Christopher Waller's statement advocating a cautious and systematic approach to interest rate cuts, U.S. Treasury yields experienced a surge.
Speaking at an online event hosted by the Brookings Institution last Tuesday, Waller expressed his belief that the Fed should lower the target range for the federal funds rate this year if inflation doesn't rebound and stay elevated. He emphasized that when the time comes for interest rate cuts, it should be executed in an orderly and cautious manner.
Waller noted that with economic activity and labor markets in good shape, and inflation gradually coming down to 2%, there is no reason to move swiftly or cut rapidly as in the past.
The Fed governor gave the most detailed speech yet on his intentions to ease policy this year. While Waller remains open to rate cuts, his comments appear to contradict market expectations for up to six rate cuts this year. The Fed keeps a close eye on core inflation, which unexpectedly rose in December. Additionally, they monitor the labor market, with data for the final month of 2023 showing strong performance, with job creation and income accelerating and the unemployment rate falling.
Despite Federal Reserve officials exercising caution due to concerns that an overheating economy might impede their efforts to combat inflation, markets are anticipating the start of an easing cycle in March. Following Waller's speech, traders have diminished the probability of a rate cut occurring as early as March, along with downward adjustments to full-year rate cut projections. We hold the opinion that a rate cut in March is unrealistic, and the market is displaying an overly zealous anticipation, preempting the Federal Reserve's trajectory.
Meanwhile, in December, U.S. retail sales exceeded expectations, driven by increased consumer purchases of cars and retailer-driven discounts aimed at bolstering sales. This development has positioned U.S. economic growth on a solid trajectory as the new year begins. According to the latest data released last Wednesday (January 17) by the U.S.
Department of Commerce Census Bureau, U.S. retail sales showed a monthly increase of 0.6% in December, surpassing expectations. Core retail sales also experienced a 0.4% rise in December, exceeding the anticipated value of 0.2%. The robust figures in retail sales signify strong economic activity and further diminish the likelihood of a rate cut in March. Our baseline expectation is that as long as individuals remain employed, with steady jobs, consumer spending will persist. It is advisable to exercise caution when betting against the spending habits of U.S. consumers.
In the equity domain, a pullback in the first quarter of this year would not surprise us. Nevertheless, we maintain our belief that the Magnificent 7—Apple (AAPL), Alphabet (GOOGL), Microsoft (MSFT), Amazon.com (AMZN), Meta Platforms (META), Tesla (TSLA), and Nvidia (NVDA)—will continue to exhibit their magnificence. For those who missed the rally, we consider it an opportune time to capitalize on the pullback. Since the commencement of 2024, the US equity markets seem to be experiencing a hangover after the stellar performance of the previous year. However, when examining the S&P's performance last year as a template for this year, we anticipate that most individuals will reassess their perspectives.
The potential for trillions of dollars to exit money market funds is within our purview. Money market funds, boasting a 5% plus return, have garnered significant attraction. Interestingly, cash has become a viable option for the first time in a generation. Anticipating interest rate cuts, some cash is likely to depart from money market funds, but this is expected to unfold systematically. It is a well-known tendency for individuals to pursue returns, and that holds no mystery.
In the foreign exchange (FX) space, we believe that the market is positioned for a net long USD, and the slightly more hawkish tone in Federal Reserve speeches has played a role in the recent rebound in USD strength. The volatility observed in FX pairs around Federal Reserve speeches is anticipated, given the Fed's utilization of interest rate policy language through the speeches to influence interest rates in the open market. Various Fed officials emerged to make statements aimed at tempering excessive market optimism about potential rate cuts during this period.
We want to emphasize that Fedspeaks has entered a blackout period starting January 20 and will continue until February 1. Federal Reserve policy imposes restrictions on the extent to which Federal Open Market Committee (FOMC) participants and staff can make public statements or grant interviews during Federal Reserve blackout periods. Consequently, we anticipate markets to consolidate in the lead-up to the FOMC meeting on February 1. This week's focal point on the economic calendar is the data print for the core Personal Consumption Expenditures (PCE) figure, which will keep the markets attentive.
We find ourselves embracing a Goldilocks narrative. In this scenario, debt growth, economic expansion, and inflation all align in a state that is neither excessively heated nor too tepid. Our perspective anticipates a synchronized global slowdown, although the likelihood of a recession or a hard landing in the U.S. during 2024 appears improbable.
China Holds MLF Rate
The People's Bank of China (PBoC) decided to keep the Medium Lending Facility (MLF) interest rate steady at 2.5% last week, disappointing those anticipating a 10 basis points cut to alleviate corporate debt financing pressures.
As per the PBoC's announcement, RMB 995 billion worth of MLF operations were executed last week. With RMB 779 billion MLF set to expire this month, the central bank has netted an investment of RMB 216 billion in funds through MLF.1 Furthermore, the central bank initiated a 7-day reverse repurchase of RMB 89 billion, maintaining the operating interest rate at 1.8%.
The excess renewal of the Medium Lending Facility is anticipated to enhance funding stability in the banking system, fostering greater support for the real economy. The key driver behind this development is the manageable current liquidity pressure, coupled with the absence of immediate urgency to accelerate the implementation of a reserve requirement ratio (RRR) reduction. The proportion of cash that banks must hold in reserve against customer deposits is known as the reserve requirement ratio.
Across the year, key tax months include January, April, May, July, and October. The monthly tax payment period consistently raises significant liquidity concerns. As funds are diverted from the commercial banking system, liquidity experiences corresponding temporal fluctuations.
The tax period in China typically spans from the 1st to the 15th of each month, with the 15th serving as the deadline for the declaration of significant taxes like value-added tax and income tax. The following two working days constitute the peak payment period, contributing to increased disruption during the tax period. In response to this, the PBoC injected excess funds through the MLF, aiming to mitigate liquidity fluctuations and alleviate the impact of tax periods on funding.
We generally hold the belief that the RRR and interest rate cuts remain within the PBoC’s monetary policy toolbox for this year. Given that a reduction in the RRR can effectively alleviate the capital cost and net interest margin pressure on financial institutions, maintain the stability of the banking system's liquidity, and encourage the financial industry to provide increased support to the real economy, we anticipate an imminent and comprehensive RRR cut. The likelihood and necessity of a targeted RRR cut still appear to be relatively higher than that of an interest rate cut.
By choosing to keep the MLF rate unchanged, we interpret this as a signal from Chinese policymakers indicating uncertainty about a potential rate cut by the Federal Reserve. The overarching concern stems from the substantial interest rate differentials between the United States and China, raising apprehensions that a cut may exacerbate depreciation pressures on the Chinese Yuan (CNY).
We believe that a more opportune time to implement rate reductions would be when the Federal Reserve initiates interest rate easing. In 2023, the USD outperformed expectations, leading to a depreciation of the CNY. Our perspective is that, at this juncture, the PBoC is inclined towards non-interest rate policy measures, reserving interest rate cuts for a later phase. We observe parallels in the market behavior between Beijing and the Fed, with both markets exhibiting anticipation of rate cuts ahead of actual implementation.
In 2023, China's economy experienced a growth of 5.2%, as per official statistics. This slightly surpassed the official target, yet challenges persist for the world's second-largest economy. The beleaguered property sector, increasing deflationary risks, and lackluster demand collectively overshadow China's economic outlook for the current year.
At the same time, there is an observation that the PBoC is making efforts to boost investment sentiment within China and overseas by signaling openness. In our assessment of this situation, it appears that the PBoC holds a distinct view of the current state, one that might not align with the Politburo. Consequently, the solutions they propose will likely need to navigate an economic landscape deemed acceptable by higher authorities in Beijing, potentially sidestepping the core issues.
Our perspective maintains that sentiment in China is persistently frail and susceptible to further deterioration. We are skeptical about the efficacy of numerous policies and slogans advocating economic development in China, questioning their ability to genuinely revitalize investors' risk appetite. The noticeable disparity between the rhetoric of economic policy and actual actions has contributed to investor disillusionment, fostering a prevailing atmosphere of bearish sentiment in China.
Improvements in economic fundamentals or green shoots in economic data might not be adequate to entice foreign funds back into the world's second-largest economy. Superior prospects for capital allocation and the potential for higher rates of return are offered by more attractive global markets.
Concerning stocks, we maintain the position that, despite the current affordability of Chinese valuations, investors should steer clear of Chinese markets in 2024. We perceive a waning interest among investors in China, hastened by a crisis of confidence and a dearth of animal spirits in the market.
Last week, the USD exhibited volatility as Federal Reserve officials worked to temper the market's unrealistic expectation of 6 rate cuts priced in for 2024. Throughout the year, intermittent impacts on USD strength are anticipated from statements made by Federal Reserve officials, often referred to as 'Fedspeaks'. The underlying rationale lies in the significant disparity between the communication strategies of the monetary policies of the United States and China. The Federal Reserve actively guides market expectations, whereas uncertainty prevails regarding when the PBoC will convene.
Nevertheless, our outlook remains unchanged, foreseeing a potential further decline towards the psychologically crucial level of 7 in 2024. This projection is grounded in the expectation that the RMB will passively strengthen against the greenback as the Federal Reserve initiates a series of rate cuts in the middle of 2024.