A report by CYS Global Remit Strategic Sales Management Team
US CPI Prints Turn Softer
Due to the sharp slowdown in energy prices, the overall CPI in the United States cooled more than expected in October, and the core CPI also fell to the lowest since September 2021 more than expected.
On November 14, data released by the U.S. Bureau of Labor Statistics showed that the U.S. CPI rose 3.2% y/y in October, which was slower than the 3.7% increase last month and lower than the expected 3.3%. The month-on-month growth slowed to 0.4% from the previous month, which is also lower than the expected 0.1%.
The slowdown in the month-on-month growth rate of core service inflation has driven the decline in the month-on-month growth rate of core inflation in the United States. The market's concerns about the stickiness of inflation have weakened, and it is expected that the Federal Reserve may have completed this round of interest rate hikes.
After the CPI data was released, the market is betting that the probability of the Federal Reserve cutting interest rates for the first time in May next year is greater than 50%, and the short-term benchmark interest rate at the end of 2024 will be a full percentage point lower than the current level.
Although the Fed kept interest rates unchanged at its last two meetings, Fed officials said there was still uncertainty about whether interest rates were high enough to curb inflation. Recent statements from Federal Reserve Chairman Jerome Powell suggest that policymakers have “no confidence” that interest rates are high enough to end the fight against inflation. The prospect of a stronger USD keeps investors away from riskier assets and maintains bearish bets on most Asian currencies.
For the world's major central banks such as the Fed, regardless of whether officials currently support interest rate cut expectations, the downward trend in Treasury yields is likely to ease financial conditions, thereby weakening the impact of the aggressive interest rate hike policies they have implemented.
The market's expectations for the end of the Fed's interest rate hike cycle and an interest rate cut in June next year can be said to challenge policymakers' statement that they will keep interest rates "higher for longer" in the foreseeable future.
Beyond the FX space, we see institutional investors looking into 2024 with (1) a soft landing of the U.S. economy (2) the Fed starting to cut interest rates (3) a weaker USD. 94% of investors expect bonds, stocks, and commodities to outperform holding cash next year.
Bank of America’s latest survey report1 shows that they are convinced that the Federal Reserve’s interest rate hikes are in place. Almost all fund managers believe that bonds, stocks, and commodities will outperform holding cash next year.
In the past three months, due to concerns that the Federal Reserve will continue to raise interest rates and keep benchmark interest rates at high levels, the 10-year U.S. Treasury yield rose above 5% last month, hitting a new high since 2007. However, the Federal Reserve's last interest rate meeting alleviated these concerns to a certain extent, and asset prices rebounded in November. The Bank of America survey also showed that investors are "confident" that the Federal Reserve has completed raising interest rates. At its strongest level, 76% of investors believe the Fed has completed raising interest rates, up from 60% in October.
Our view is that 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.
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 Property Sector Drags
The anticipated vibrancy of the "Golden September and Silver October" property market fell short of expectations, ending on a subdued note. Key indicators, including real estate development investment, commercial housing sales, and capital availability for real estate companies, witnessed a continued year-on-year decline, signaling persistent challenges in the property sector.
From January to October, China’s real estate development investment sank by 9.3% y/y1, while the housing construction area of real estate development enterprises was 8.23 million square meters, a y/y decrease of 7.3%.
The area of newly started housing construction was 791.77 million square meters, a decrease of 23.2% y/y. Among them, the area of newly started residential construction was 576.59 million square meters, a decrease of 23.6% y/y.
Home buyers’ caution and wait-and-see are important factors affecting commercial housing sales. Indicators such as real estate development investment and the availability of capital for real estate companies are also affected by sales sentiment and appear to be even more sluggish.
The poor performance of real estate development investment is affected by a variety of factors, including the pressure on the balance sheet of real estate companies, pressure on sales, and the problem of relatively large inventory scale, all of which keep development investment indicators at a low level.
From the demand side, China's population has begun to decrease. Last year, the population decreased by 850,000. This year, it is expected that the population will decrease by about two to three million. Housing prices are considered in the next twenty or thirty years when a purchase is made. China’s population will decline in the next 20 to 30 years, hence it casts doubt on the support housing prices will have. Housing prices in the medium and long term will depend on the population growth.
In China’s context, demand has shifted significantly, both from a population perspective and from a demographic perspective. The age structure of the population has undergone major changes, which means that aging has occurred and is accelerating. China has entered a retirement peak since last year. Because China entered its baby boom in 1962 and its retirement peak 60 years later, the number of retired people every year is probably more than 25 million, or even more. After 1962, the number of births in some years was as high as more than 29 million. China's annual retirement population has been more than 25 million, and even as high as 29 million. Aging is accelerating by 1 percentage point every year. This is a very big problem for the real estate sector, as the elderly do not need to buy a house anymore, because buying a house is the need of young people.
The real estate sector is a pillar industry for the Chinese economy, and it plays a very large role in China's GDP, When the real estate sector begins to decline, its role in stimulating total demand will decrease. On one hand, the population is decreasing, and on the other hand, the population is aging, and the birthrate is declining. The combined effect of these three factors will lead to a decrease in demand. Quite naturally, a slowdown in real estate sector will drag down the Chinese economy, and a decline in growth is a very likely problem.
The downturn in China’s real estate industry is inevitable, and demographic trends will determine this. We see that there can only be ways to ensure that it does not decline too quickly. A longer-term solution is to rebalance the economy toward more consumption-led growth.
At this juncture, we still see the Chinese economy recovering, just that the recovery is uneven in different places and industry. More importantly, we think that it is crucial for the Chinese government to figure out how to resolve the property bubble that is deflating and taking banks and local governments with it.
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 weaker USD (due to softer US CPI prints) favors a near-term appreciation of the RMB against the greenback. Source: mp.weixin.qq.com
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