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FOMC Minutes Lift USD China Economy Struggles

Contributed by Jeff Cheah, Strategic Sales Manager

Hawkish FOMC Minutes Lifted USD | skip to SGD/CNY

On August 16, EST, the Fed announced the minutes of its July interest rate meeting. The minutes showed that most participants continued to believe that there were significant upside risks to inflation and that further tightening of monetary policy might be required. Participants remained firmly committed to reducing inflation to the Committee's (FOMC) 2 percent objective.

Almost all participants agreed that it would be appropriate to raise the target range for the federal funds rate to 5.25% to 5.5% at the July meeting. Participants noted that this action would move the stance of monetary policy further into restrictive territory, consistent with reducing supply-demand imbalances in the economy and helping restore price stability.

But several participants said they favored keeping the target range for the federal funds rate unchanged, judging that maintaining the current level of restraint at this point would likely move (inflation) further toward the committee's goal while giving the committee time further assess this progress.

In discussing the policy outlook, participants continued to believe that the stance of monetary policy needed to be sufficiently restrictive to bring inflation back to the Committee's 2 percent objective over time.

They noted that uncertainty about the economic outlook remained high and agreed that policy decisions at future meetings should depend on the overall picture and implications of incoming information on the economic outlook and inflation and the balance of risks.

In assessing the economic outlook, participants noted that real GDP growth stood resilient in the first half of the year and that the economy had considerable momentum. However, a gradual slowdown in economic activity appears to be underway, consistent with the dampening of demand from the cumulative tightening of monetary policy since early last year and the associated impact on financial markets. Participants commented that monetary policy tightening appeared to be having the expected broad-based effect and that a sustained gradual slowdown in real GDP growth would help reduce supply-demand imbalances in the economy. Participants assessed that credit conditions in the banking sector continued to tighten, as evidenced by recent surveys of banks, and could also weigh on economic activity in the coming quarters.

The participants noted that both headline inflation rates and core inflation rates have declined recently. However, they stressed that inflation remained unacceptably high and required further evidence to be confident that inflation was on track to the Committee's 2 percent target.

Participants continued to believe that a period of below-trend growth in real GDP and some slack in labor market conditions was a measure to better balance aggregate supply and aggregate demand and sufficiently reduce inflationary pressures to allow inflation to follow time-lapse back to the 2% necessary condition.

The hawkish FOMC minutes have aided in the bullish momentum of the USD. At this juncture, we are biased toward a pullback of the USD, as we prefer not to put too much weight on the minutes last month. We retain our view for a moderate-to-soft dollar outlook, given the Fed is near the end of its tightening cycle.

China Economy Still in Struggle

Driven by summer travel, the retail sales of transportation, accommodation, catering, and other services accelerated. In July, operating passenger traffic increased by 47% y/y, and catering revenue increased by 15.8%. From January to July, the retail sales of services increased by 20.3% y/y, significantly faster than the growth rate of retail sales of goods.

The offline consumption scene resumed and expanded, and entertainment activities such as cultural and sports performances increased significantly, driving consumption growth. Judging from the movie box office situation in July, the national movie box office revenue increased by 111% m/m, and the number of moviegoers increased by 100.7% m/m.

In terms of investment, from January to July, the national fixed asset investment (excluding rural households) was RMB 28,589.8 billion, a y/y increase of 3.4%. In terms of sectors, infrastructure investment increased by 6.8% y/y, manufacturing investment increased by 5.7%, and real estate development investment decreased by 8.5%.

The recent Politburo meeting pointed out that it is necessary to adapt to the new situation of major changes in the relationship between supply and demand in China’s real estate market, adjust and optimize real estate policies promptly, implement policies according to cities and make good use of the policy toolbox, better meet the rigid and improved housing needs of residents, and promote the stability of the real estate market healthy growth.

At this juncture, we see the support of SGDCNY at 5.3450. Further strengthening of CNY is likely to be driven by green shoots in China’s macroeconomic data.

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