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Hot US CPI Prints | skip to SGD/CNY
Data released by the U.S. Bureau of Labor Statistics revealed that the U.S. Consumer Price Index (CPI) experienced a year-on-year increase of 3.4% in December 2023, surpassing the previous figure of 3.1%. However, the core CPI, which excludes volatile food and energy prices, exhibited a year-on-year increase of 3.9%, slightly lower than the previous value of 4.0%, thereby continuing its downward trajectory. The data indicates a degree of 'volatility' in the U.S. deflationary process, implying that market expectations for the Federal Reserve to cut interest rates in March might not materialize.
During a recent speech in New York, John Williams of the New York Federal Reserve, who also holds the position of vice chairman on the policy-setting Federal Open Market Committee (FOMC) and serves as a permanent voting member, demonstrated a significant change in tone compared to his mid-December speech from the previous year. In this latest speech, Williams transitioned from a hawkish to a more dovish stance. He conveyed an optimistic perspective on the U.S. inflation outlook, asserting that, with the decline in inflation, a natural course of action would involve the commencement of interest rate cuts.
In his speech, Williams asserted that the current monetary policy of the Federal Reserve has been tightened sufficiently to steer inflation back to the Fed's targeted level. He stated1,” My base case is that the current restrictive stance of monetary policy will continue to restore balance and bring inflation back to our 2 percent longer-run goal. I expect that we will need to maintain a restrictive stance of policy for some time to fully achieve our goals, and it will only be appropriate to dial back the degree of policy restraint when we are confident that inflation is moving toward 2 percent on a sustained basis”.
In addition, Williams emphasized that as inflation decreases, a corresponding reduction in interest rates is a natural progression. This sentiment has been echoed by several other Federal Reserve officials in the past few weeks. While Williams acknowledged in his speech that the 'timing and speed of interest rate cuts will still depend on inflation and economic development,' the overall tone of his remarks in this instance marked a distinct departure from his speech on December 15.
In mid-December of the previous year, shortly after the Federal Reserve unveiled its dot plot, projecting a 75-basis points interest rate cut in 2024, Williams took a more cautious stance, tempering market expectations. In his speech during that period, he raised the question of whether the current monetary policy is 'tight enough' to guarantee a return of inflation to the 2% target. Williams underscored that, at that point, Fed officials had not extensively discussed the prospect of interest rate cuts and affirmed their readiness to continue raising rates if deemed necessary.
The Federal Reserve is poised to initiate significant interest rate cuts soon. Analyzing U.S. non-farm employment and inflation data, while the overall inflation trend is on a downward trajectory, historical patterns suggest that the 'last mile' of deflation is often characterized by unpredictable fluctuations. Premature interest rate cuts by the Federal Reserve could potentially disrupt the existing downward inflation trend and elevate the volatility of its monetary policy. A more cautious approach may be necessary, requiring additional data for observation. Consequently, in the baseline scenario, the Federal Reserve is anticipated to make its first interest rate cut in middle of 2024, with the subsequent pace of rate reductions remaining highly uncertain.
In the realm of equity, we hold the perspective that technology's enduring presence propelled it to the forefront of the US equity market in 2023. We assert that technology has evolved into a defensive component within investors' portfolios. It has become an indispensable element in our daily lives, something we cannot do without. We anticipate that the convergence of a soft-landing narrative, Federal Reserve rate cuts, and a disinflationary trend will prove advantageous for equity. However, we want to emphasize the possibility that markets might become apprehensive due to robust economic growth. While solid economic growth is initially perceived as positive news, there may come a time when it is considered unfavorable.
We believe that the S&P 500's best days are not behind it. Our preference lies with prominent names in the tech sector, particularly the 'magnificent 7' stocks - Apple (AAPL), Alphabet (GOOGL), Microsoft (MSFT), Amazon.com (AMZN), Meta Platforms (META), Tesla (TSLA), and Nvidia (NVDA). Contrary to concerns about a tech bubble, these companies exhibit profitable growth, leading us to anticipate sustained success in the tech sector. At present, there is an estimated USD 6 trillion parked in money markets. As yields and rates decline, money market returns are expected to decrease. Dissatisfied with lower returns, investors are likely to exit the money market in search of better opportunities. It is plausible that these funds will flow into the equity market.
In our perspective, adopting a thematic approach to outperforming the market makes sense. This encompasses companies across various sectors that are actively embracing the fourth industrial revolution, incorporating elements such as Digitalization, Artificial Intelligence (AI), and Cloud Computing. Additionally, it extends to the suppliers of these technological tools, positioning them strategically within this evolving landscape.
In the foreign exchange (FX) space, we hold the belief that the decline of the USD is not a unidirectional trend. Anticipated actions by the Federal Reserve to ease could lead to a downward bias of the USD, and a scaling back of such expectations may make the USD susceptible to an upward uptick. However, in the broader context, we maintain the perspective that the Fed has concluded its tightening phase for the current cycle and could initiate its first rate cut in middle of 2024.
We contend that the unexpectedly high Consumer Price Index (CPI) data may not carry significant consequences, particularly since the core Personal Consumption Expenditures Price Index (PCE) serves as the Fed's preferred inflation gauge. The PCE excludes the more volatile costs of food and energy. Nevertheless, we welcome the elevated CPI data, as it prompts a reduction in aggressive Fed rate cut expectations and contributes to a firmer USD.
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’s Deflationary Pressures
For the third consecutive month, the National Bureau of Statistics reported that the national Consumer Price Index (CPI) in December remained in negative territory, experiencing a year-on-year decline of 0.3%. This ongoing trend highlights the deflationary risks confronting the world's second-largest economy as it grapples with the challenges of rebounding from a post-pandemic slump and coping with subdued domestic demand. In the same period, the national Industrial Producer Price (PPI) also witnessed a year-on-year decrease of 2.7% and a month-on-month dip of 0.3%
The decline in December's Consumer Price Index (CPI) is primarily attributed to a reduction in food prices, witnessing a 3.7% decrease. This decline is 0.5 percentage points narrower compared to the previous month, contributing to an approximately 0.70 percentage point drop in the CPI. Within the category of food, pork prices experienced a notable fall of 26.1%, with the decline narrowing by 5.7 percentage points. This impacted the CPI to decrease by about 0.43 percentage points and served as the primary factor driving the year-on-year decline in CPI. Additionally, prices for eggs, beef and mutton, edible oil, and poultry meat recorded declines ranging from 1.7% to 8.4%.
The disastrous impact of deflation is not yet fully comprehended by many individuals. There is a misguided tendency to dismiss it, with some asserting that it is not deflation. The current deflationary situation in China poses a substantial and pressing economic challenge that warrants serious attention. We contend that when China's Consumer Price Index (CPI) falls below 0%, it signifies deflation, which poses risks to employment and economic growth. Currently, the CPI has been below 0% for several consecutive months. The gravity of this situation cannot be underestimated, and it is imperative that we do not turn a blind eye or engage in self-deception.
The anticipation of further price declines due to deflation can prompt residents to defer consumption and increase savings, resulting in a decrease in overall social consumption levels. The reduction in consumer demand may lead to a decline in business sales revenue, subsequently reducing production and investment. This, in turn, may result in companies downsizing, laying off workers, or decreasing hiring, leading to an increase in unemployment rates. The consequent rise in unemployment further diminishes residents' spending power, creating a negative cycle that inflicts additional harm on the Chinese economy.
Within a deflationary setting, the actual burden of debt tends to rise due to the fixed nominal amount of debt. This dynamic can elevate the pressure on debtors, encompassing both companies and governments, as they grapple with heightened challenges in debt repayment. Such circumstances can impact the stability of financial markets.
Beyond the influence of food prices, notably pork, a sizable portion of China's manufacturing and service industry products is presently encountering a pervasive oversupply coupled with insufficient aggregate demand. When viewed in the context of both domestic and international factors, these issues of widespread oversupply and inadequate demand pose substantial long-term challenges. Addressing deflation and reversing the conditions of surplus and insufficient demand may prove to be a formidable and enduring task for China.
There is a widespread anticipation in the market that the Chinese government will adopt more robust measures, including the implementation of fiscal stimulus policies and interest rate reductions, to invigorate economic growth and mitigate the potential long-term adverse effects of deflation on the economy. The government's decisive policy response plays a pivotal role in averting the escalation of the deflationary spiral and preventing further deterioration of the economy.
We hold the viewpoint that sentiment in China remains weak and is prone to further decline. We harbor skepticism regarding the effectiveness of the numerous policies and slogans championing economic development in China to sufficiently rejuvenate investors' risk appetite. A discernible gap between the rhetoric of economic policy and tangible actions has engendered investor disillusionment, fostering an overarching 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. In the end, more attractive markets globally present superior prospects for capital allocation and the potential for higher rates of return.
In relation to stocks, our stance is that, despite the current affordability of Chinese valuations, investors should avoid Chinese markets in 2024. We believe there is a diminishing interest among investors in China, manifested by capital outflows redirecting towards other emerging markets.
In the FX space, we see the weaker USD (due to Fed’s explicit pivot towards cuts in 2024) to continue to contribute to the strengthening of the RMB. A further decline toward the psychological key 7 level in 2024 is as the RMB passively strengthens against the greenback. The recent RMB exchange rate has returned to the appreciation channel, due to the continuous decline of the USD index and changes in market expectations.