A report by CYS Global Remit Strategic Sales Management Team
Nov FOMC Pause Expected | skip to SGD/CNY
Data released by the U.S. Department of Commerce's Bureau of Economic Analysis last Thursday showed the preliminary reading of U.S. gross domestic product (GDP) in the third quarter came in at 4.9%, a new high since the fourth quarter of 2021. Driven by strong consumer spending, economic growth topped the market expectations of 4.7%.
The U.S. Department of Labor also reported that initial jobless claims increased by 10,000 to 210,000 in the week ended October 21. Lower jobless claims suggest employment conditions remain very strong and economic growth may not slow as much in the fourth quarter as many economists expect. This favors the US economy resilience story that has been keeping the USD the preferred bid. Low claims mean few layoffs.
The continued rise in jobless claims could mean hiring is slowing. Economists say that if more and more workers continue to rely on government support and are unable to find other jobs quickly, then the continued unemployment benefit numbers are worthy of attention and indicate a signal of weak labor demand.
Meanwhile, the U.S. Department of Commerce reported that the Fed’s favorite inflation indicator, the core PCE price index excluding food and energy, fell back to 3.7% y/y from 3.9% in August, in line with market expectations and hitting a new low since May 2021.
Currently, U.S. inflation is well below the 40-year high figure last year. However, US inflation cooling has stalled recently, suggesting the Fed cannot declare victory in the inflation fight just yet. Boosted by the rebound in consumer spending, the PCE indicator- favored by the Fed to measure potential inflation - accelerated to a four-month high in September.
Entering the fourth quarter, a combination of a pickup in price pressures and a recovery in household demand could lead to the Fed raising interest rates in the coming months.
JPMorgan noted that in the past, when the USD strengthened, global stock markets were almost always under pressure. The bank believes that "the large interest rate differential between the United States and most countries suggests that the USD may continue to be favored. If this occurs, global stock markets as a whole may continue to be under pressure."
Recently, global stock markets have faced many negative factors. In addition to rising oil prices driven by reduced supply and heightened geopolitical uncertainty, as well as rising U.S. bond yields caused by U.S. fiscal concerns and "the Federal Reserve keeping interest rates higher-for-longer”, renewed strength in the USD is another factor to digest.
USD is generally beneficial to markets such as Japan, the United Kingdom, and Switzerland. That is, when the USD strengthens, Japan, Switzerland, and British stock markets tend to perform better. On the other hand, U.S. and emerging market stocks underperformed.
This week, the key risk event is the Fed FOMC meeting on 2 Nov. The Fed is widely expected to stand pat on rates, following obvious cues from Powell’s speech two weeks ago. We continue to hold the view that even if the Fed completes raising interest rates, it is unlikely that Fed officials will formally announce a halt to rate hikes. After all, the Fed has repeatedly surprised itself with the economy's resilience and is more willing to leave the door open to further rate hikes. We see the USD consolidating sideways in this crucial week.
China’s Mid-year Fiscal Budget Revised
China announced an unusual move to revise its mid-year fiscal budget, as the Chinese central government spring surprises in hopes of boosting its stalling economy. At this time, the central government has adjusted its budget and issued additional government bonds, which is a strong signal to stabilize growth and confidence.
China will issue an additional RMB 1 trillion of 2023 treasury bonds in the fourth quarter of this year. All the additional treasury bonds will be allocated to local governments through transfer payments to focus on supporting post-disaster recovery and reconstruction and making up for shortcomings in disaster prevention, reduction, and relief, improving China's ability to withstand natural disasters.
On the 24th of October, the Sixth Session of the Standing Committee of the 14th National People's Congress voted to adopt the resolution of the Standing Committee of the National People's Congress on approving the State Council's issuance of additional treasury bonds and the 2023 central budget adjustment plan.
Since the beginning of this year, many places in China have suffered from heavy rains, floods, typhoons, and other disasters, and local post-disaster recovery and reconstruction tasks have been heavy. In recent years, various types of extreme natural disasters have frequently occurred, placing higher demands on China's disaster prevention, reduction, and relief capabilities.
The Standing Committee of the Political Bureau of the CPC Central Committee held a meeting on August 17 to study and deploy flood prevention, flood relief, and post-disaster recovery and reconstruction work, and proposed to "accelerate recovery and reconstruction" and "further enhance China's disaster prevention, reduction, and relief capabilities."
Taking stock, the GDP growth rate in the first three quarters reached 5.2%, and the GDP growth rate in the fourth quarter needs to reach 4.4% or above to achieve the full-year GDP target. In September, most economic indicators were better than market expectations. The actual GDP was 4.9% y/y, 0.4 percentage points higher than market expectations.
Considering the economic growth target of about 5% in 2023, the GDP growth rate in the fourth quarter needs to be 4.4% or above. Bearing in mind that the GDP growth rate in the fourth quarter of 2022 is 2.9% - under the base effect, there will be little pressure on economic growth in the fourth quarter.
Historical experience shows that before 2023, the central government adjusted the deficit less frequently in the middle of the year, only four times in history. The first three times occurred in late August from 1998 to 2000 when additional government bonds were issued for infrastructure construction such as water conservancy and transportation. In late October 2023, the central government once again increased its investment in the middle of the year and issued an additional RMB 1 trillion of government bonds. In addition to effectively supplementing local construction funds, it also further released a positive signal from the policy.
From the perspective of investment direction and release mechanism, the newly issued RMB 1 trillion treasury bonds are identical to the long-term construction treasury bonds and the special treasury bonds issued in 2020. Just like the 2020 special treasury bonds, all the additional issuance of treasury bonds worth RMB 1 trillion will be arranged to local governments through transfer payments, which may effectively supplement the lack of local construction funds caused by the drag on land finance. From an investment perspective, the additional issuance of treasury bonds is similar to that of long-term construction treasury bonds and will be used in eight major areas including post-disaster recovery and reconstruction, and flood control.
We do not agree with certain market views that the central government’s move to increase the fiscal deficit from 3% to 3.8% is a bold stimulus. This is, at best, a measured response. We also view President Xi’s visit to the PBoC as a non-event and not material for the financial markets. Any boost in the market only allows foreign firms to get out with a market-plus premium. We have always maintained our take that improvement in economic fundamentals is crucial to revive investors’ risk-on sentiments, and encourage foreign fund flows back into the world’s second-largest economy. At this juncture, we see the RMB still struggling to regain traction against the USD.