George Lucas, Raiz Group CEO
First let’s look at developments this week in Asia. In Malaysia, the nation’s central bank left its policy rate on hold at 1.75 per cent on Thursday despite the poor economic outlook, suggesting further loosening is unlikely.
Malaysia is currently in the grips of another extended nationwide lockdown imposed to contain a lift in COVID-19 infections, and with economic recovery there likely to be sluggish and stop-start, we think Bank Negara Malaysia will keep rates at their current low until at least the end of 2022.
Meanwhile in China, it is increasingly evident that the Asian superpower’s economy is slowing down. The latest round of economic data came in below consensus, and we expect that trend to continue.
China’s economy has already lost some momentum since late last year, and price pressures there are no longer building. This has already had flow-on effects to equities with the prices of some key industrial commodities pulling back, but not much compared to where they were 12 months ago.
RBA hints at adjustment on rates guidance
The slowdown in China has implications for Australia. The Reserve Bank of Australia had a hawkish message after their Tuesday meeting, but it’s likely the RBA is reviewing the domestic recovery and how strong that could be since the recent lockdown in NSW as well as downside risks from China.
Even so, the RBA’s latest statement remained upbeat. It left the date of the forward guidance on the first increase in the cash rate unmoved at 2024, while keeping open a potential adjustment to this guidance given Australia robust economic fundamentals at present.
On this point, money markets in Australia are now discounting interest rate hikes well in advance of what policymakers have so far signalled that they consider probable, while Australia’s labour market will likely improve faster than officials currently forecast, prompting the RBA to tighten policy earlier.
Treasury yields continue fall on US economy jitters
In the US, this week saw US Government bond yields fall further, while stock markets inched back from their highs, and the sectors like energy and financials that gained most from the reflation/rotation narrative have underperformed.
The rotation/reflation trade may become less useful in the coming quarters for the market. Parts of that trade, like the very rapid gains in most stock markets, the outperformance of energy firms, and the appreciation of some high-beta currencies are probably over for the time being.
Why has this all happened? A big driver is that optimism about how quickly the US economy can recover now appears to be peaking. After massive upward revisions to consensus growth forecasts in Q1, some disappointing US data released earlier in the week — the ISM non-manufacturing survey and initial jobless claims figures — have impacted the markets.
Investors also seem increasingly convinced by the US Federal Reserve’s argument that the current burst of inflation will prove transitory. The hawkish shift in the FOMC’s projections released after its June policy meeting probably contributed on this front, calling into question how hot policymakers will be comfortable allowing the economy to run, before withdrawing support.
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