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US Payroll Drags | CN PMI a Let-Down

A report by CYS Global Remit Strategic Sales Management Team

Fed Stands Pat on Rate | skip to SGD/CNY

U.S. job growth slowed more than expected in October, in part because a UAW strike against Detroit's "Big Three" automakers pushed down manufacturing payrolls while wage inflation cooled, signalling that labor market conditions for auto workers have eased.

The U.S. Department of Labor's Bureau of Labor Statistics (BLS) said in last Friday's closely watched jobs report that non-farm payrolls increased by 150,000 jobs last month, falling short of market expectations of 178,000. September's data was revised downward to show 297,000 jobs were created instead of the 336,000 previously reported.

The job report is likely to reinforce financial market expectations that the Fed is done raising interest rates for the current cycle. The Federal Reserve kept interest rates steady last Wednesday but left the door open to further increases in borrowing costs in recognition of the economy's resilience.

In his speech last week, Fed Chair Powell emphasized that the Fed remains committed and determined to achieve its goal of reducing inflation to 2%. "We still have a long way to go to get inflation down to 2% sustainably," he added. When it comes to the Fed's upcoming changes to its monetary policy, the release made clear that the committee is still "determining the extent of further tightening" that may be needed to achieve its dual mandate. The statement also mentioned the need for flexibility, saying "The Committee will continue to evaluate additional information and its impact on monetary policy."

The Fed's monetary policy hints that interest rates will be kept high, and "higher for longer" remains its core theme. As long as the Fed remains focused on lowering inflation, Powell has maintained that they are not even considering or discussing a rate cut now, with the full effects of the policy have yet to be felt. With the Fed not raising interest rates, a restrictive monetary policy currently in place will continue until the data shows otherwise. He also reiterated that the Fed has and will continue to tighten its monetary policy stance significantly, as evidenced by its multiple interest rate hikes and reduction of securities holdings. Regarding risks, the Fed Chair added that the banking system is very resilient and raising interest rates will not substantially change this situation. Rising global geopolitical tensions and future government shutdowns are potential sources of risk.

Recent data does not support the Fed to continue raising interest rates. It is expected that there will be no more interest rate hikes in December. However, if the recent inflation significantly exceeds expectations, especially if core inflation and inflation expectations pick up significantly, the possibility of the Fed raising interest rates may increase. It is expected that the Federal Reserve will continue to maintain tight guidance on the market. Unless inflation rebounds sharply again, and the economy continues to grow faster than expected, the possibility of raising interest rates again is very small.

Our view is the Fed is done with its tightening cycle. 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. For now, we see USD weakness against some high-beta Asian FX peers. To take stock, the past weeks have seen USD supported on the back of (1) the “higher-for-longer” Fed’s slogan (2) tightening bias to rein inflation forces (3) lack of risk-on sentiments in Asia markets. At this juncture, we think the dip in non-farm payrolls could be one of the turning points in data prints that USD bears are looking for. Note that US CPI prints will be out next week – on 14 Nov. That is a risk event for the market. We do caution that USD resilience in 2023 means sporadic and intermittent USD upticks can still be expected.

With the Fed at the end of its tightening cycle, we opine for a moderate-to-soft USD profile to play out eventually. However, for the market to support that narrative, we need to see Fed officials introduce “rate cuts” in their interest rate policy languages – which is not expected to happen until the first half of 2024.

China’s PMI Data Disappoints

China’s factory activity in October slipped to the contraction range, as the world’s second-largest economy continues to battle a fragile economic recovery. China’s manufacturing Purchasing Managers Index (PMI) was 49.5%, down 0.7 percentage points from September, falling into the contraction territory. [1]Similarly, Caixin China Manufacturing PMI also fell below for October recording 49.5%, 1.1 percentage points lower than the previous month, slipping below the 50-mark separates expansion and contraction after two months. Both the official PMI and the Caixin PMI agree – there was a slight contraction.

The decline in PMI is not only affected by seasonal factors but also shows that the momentum of economic recovery still needs to be strengthened. The focus in the next step is on expanding domestic demand, giving priority to the restoration and expansion of private enterprise investment and household consumption while strengthening employment security and taking multiple measures to consolidate the foundation for economic recovery further.

From the perspective of sub-indicators, the production index, and several demand indexes all fell. In particular, the price index fell significantly. The proportion of enterprises reflecting insufficient demand accounted for nearly 60%. Insufficient demand has led to oversupply, causing the price index and production index to fall. We think that the constraints that shrinking demand places on the recovery of corporate production cannot be underestimated. The recent issuance of government bonds to support infrastructure construction and other measures is expected to drive an increase in corporate orders through government investment, which will play a positive role in boosting confidence and driving a rebound in corporate production and investment. We believe that it is necessary to further strengthen the role of government investment in driving enterprise production and investment and reverse the trend of shrinking demand as soon as possible.

The economy showed signs of bottoming out in the third quarter, but the foundation for economic recovery is still not solid. At the policy level, based on several previous policies to promote consumption, expand investment, and stabilize expectations, the central government recently decided to issue an additional RMB 1 trillion in government bonds to support post-disaster reconstruction and improve disaster prevention, reduction, and relief capabilities. This part of infrastructure construction investment will help stabilize the economy, but the transmission effect on the increase in residents' income and the improvement in employment and expectations requires further observation.

We opine that China is suffering from a crisis of confidence, with market sentiments wobbly. Investors lack confidence in China. There is clear room for further downside in the Chinese market ahead given a lot of negatives in terms of the property market. We remain cautious but do not wish to be overly pessimistic as the street as we have seen in past instances that the Chinese market can move fast if there is clearer guidance policy-wise.

To revive investors’ sentiments, the government needs to give off a pro-market stance and clear policy support. However, there is the added challenge of communicating it in a way that shores back up investor confidence. Without this combination, any rally will likely be short-lived and unsustainable.

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. For now, a softer USD (due to soft US data prints) favours a near-term appreciation of the RMB against the greenback.


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