2024-12-23 12:01

Key takeaways US tariffs would scramble supply chains and trade flows across ASEAN; Vietnam may be most exposed. Uncertainty around trade policy is also set to weigh on manufacturing investment across the region. But resilient local demand, and extra stimulus, should keep the region humming. Indonesia continues to chug along at its customary pace, with little impact from global trade tensions expected, while a new president may ultimately inject renewed vitality. Thailand is among the few who will see growth pick up, helped by fiscal spending and more tourists. The Philippines, too, more insulated than others from global trade friction, is heading back up, while in Malaysia may things cool at the margin as investment suffers from tariff uncertainty. Next door, Singapore will closely monitor the impact of trade tensions on its economy, while services continue to provide support. A nudge down in growth is also expected in Vietnam, though that still leaves it on top in ASEAN. Economy profiles Key upcoming events Source: Refinitiv Eikon, HSBC Indonesia A new innings Prabowo Subianto took over as Indonesia’s new president in October. Finance Minister Sri Mulyani’s reappointment came as a positive surprise to markets. All eyes are now on the key policies the new government champions. Prabowo has spoken at length about continuing his predecessor’s reforms – embarking on down-streaming 2.0, and continuing the infrastructure build-out. However, we believe there will be challenges along the way: for instance, lowering Indonesia’s carbon footprint, and restructuring certain state-owned enterprises (SOEs). Meanwhile, growth has been on a weak footing. The PMI has been in contraction for five straight months, and GDP is only 7% above the pre-pandemic trend. In fact, the 3Q GDP growth print softened to 4.9% y-o-y. The details were telling. It was mainly government spending that drove investment. The latter is growing faster than consumption. Industry grew at a faster pace than services. Manufacturing appears to be climbing up the metals value chain, albeit rather gradually. Indonesia wants to raise potential GDP growth as a policy priority. We believe that fiscal and monetary policy stimulus may not be sufficient. Breaking away from commodity price swings by raising geographically-diversified and higher value-added exports could bring large gains. Some good things have happened in recent years: Indonesia has gained market share in global exports, it has a trade surplus with the US, and a falling trade deficit with mainland China. Yet, these haven’t been able to lift domestic growth, because about half of the exports are commodity-linked with few backward linkages. And almost all of the exports to its biggest trade partner, mainland China, comprise of commodity-intensive products. And yet, there are encouraging nascent signs of export diversification. Indonesia’s exports to the US look very different, in fact a lot like Vietnam’s export mix, comprising a lot more in terms of apparel, footwear, electrical machinery, and furniture. Vehicle exports to ASEAN are rising, as are electronics exports to the US and LatAm. But these are still rather small (for instance, just 9% of Indonesia’s exports go to the US) and need to be scaled up. Is that doable against an increasingly challenging global backdrop of rising trade protectionism? It will not be easy, but it is not impossible either. Indonesia doesn’t run a formidable trade surplus with the US, which could arguably protect it from large tariff increases. It could even benefit from supply chains getting rejigged in response to new tariffs on key exporters. And what will make it all happen? Indonesia will have to work hard on several fronts − enhancing infrastructure development, expanding trade agreements, developing a skilled workforce, and streamlining business practices. Manufacturing PMI has been in contraction for five consecutive months Source: CEIC, HSBC Inflation is well below BI’s 2.5% target Source: CEIC, HSBC Malaysia An investment darling Malaysia’s recovery story continues strongly in 2024. After growing at a stellar rate of 5.1% y-o-y in 1H24, the economy accelerated to 5.3% y-o-y in 3Q24. But more importantly, growth has been “on fire” across all sectors. For one, Malaysia’s manufacturing sector continues to strengthen. However, it is a mixed picture when viewed by products. Electrical & electronics (E&E) exports have seen a decent rebound, benefitting from an improvement in global consumer electronics. Compared to peers, there is still room for Malaysia’s trade sector to improve, although that’s not the case for the commodity side. Palm oil continues to register double-digit growth, but oil and LNG exports remain drags on exports. All eyes are now on US trade policies after Trump’s successful re-election as US president. Many of his proposed policy measures could hit global trade, but there is still a great deal of uncertainty. Malaysia’s sizeable trade surplus with the US may attract unwanted attention, and its prominent semiconductor sector may be among the areas that are vulnerable to tariff risks. Despite external risks, consumption and investment can, fortunately, partially support growth. What stands out is the impressive growth in gross fixed capital formation (GFCF), which expanded by double-digits for three consecutive quarters, where strength came from both the public and private sides. Given the strong momentum, we recently upgraded our GDP growth for 2024 to 5.2% (from 5.0%), closer to the upper-end of the government’s forecast range of 4.8-5.3%. Meanwhile, we also upgraded our 2025 growth forecast to 4.8% (from 4.6%). Outside of growth, inflation remains largely benign. Headline inflation averaged around 1.8% y-o-y in the first ten months of the year. Given recent downside surprises, we recently revised our headline inflation forecast down to 1.9% (from 2.3%) for 2024 and to 2.7% (from 3%) for 2025, although we acknowledge uncertainty from the potential subsidy rationalisation on RON95. We believe Bank Negara Malaysia (BNM) will keep its policy rate unchanged at 3%, a view we have held for a long time. That being said, the possibility of a rate hike, from potential upside risks to inflation, is likely to be higher than a rate cut; however, neither is our base case. Electronic exports are rebounding while commodities exports have been contracting Source: CEIC, HSBC Inflation has remained manageable, providing room for BNM to stay on hold Source: CEIC, HSBC Philippines Avoiding turbulence As global trade tensions loom, the Philippines is among the most insulated economies in ASEAN when it comes to tariff risks. For one, the archipelago is not known as a major exporter of goods; in 2023, the Philippines had the smallest export exposure in ASEAN at 16.8% of its GDP. But its insulation goes beyond its exposure in goods. The Philippines’ economic niche is in services exports. Not only is this an industry with minimal tariff risk, but artificial intelligence and digitalisation have made services more tradeable – giving the Philippines a window of opportunity to take-off and expand its global economic footprint. But the Philippines isn’t completely insulated. The economy can be indirectly affected through monetary policy and FX. Its current account balance has been in deficit ever since the end of the pandemic due to the government’s ambitious infrastructure agenda. This makes the Philippines susceptible to exchange rate volatility if the Federal Reserve (Fed) were to decide to cut its easing cycle short and keep its monetary policy rate higher than expected. Such may be the case if the tariff policies in the US stoke inflation yet again. This, of course, complicates the Bangko Sentral ng Pilipinas’ (BSP) ongoing easing cycle. Domestic economic conditions already warrant further easing. Growth in 3Q24 surprised on the downside due to the super typhoons that plagued the archipelago over the past three months, such as Typhoon Yagi and Man-Yi. Furthermore, inflation has been benign, staying within the lower-end range of the BSP’s 2-4% target band. We expect inflation to remain within the lower-bound range throughout 2025 with low tariff rates on rice putting a lid on overall prices. This low inflation environment gives the BSP the impetus to continue its easing cycle. But the pace matters. The BSP is likely to be mindful of the Fed’s easing cycle to mitigate the volatility in the USD-PHP and stem the risk of FX-induced inflation. That being said, we recently changed our policy rate forecast and expect a slower and longer easing cycle but kept our end-rate forecast at 5.00%. Instead of cutting policy rates in consecutive rate-setting meetings, we now expect the BSP to clock in the same pace as the Fed by cutting in every other Monetary Board meeting. This implies that the BSP is likely to end its easing cycle in 3Q25 at 5.00%. Due to its limited exposure in goods exports, the Philippines is insulated from tariff risks Source: CEIC, HSBC We expect headline inflation to remain below 3.0% y-o-y throughout 2025 Note: Shaded area represents HSBC forecasts. Source: CEIC, HSBC Singapore A big swing It is not every day a developed market (DM) sees growth over 5% y-o-y. Singapore did. After growing 3% y-o-y in 1H24, Singapore’s growth accelerated to 5.4% y-o-y in 3Q. This placed Singapore as the second fastest-growing economy in ASEAN in 3Q, just after Vietnam. That being said, a deep-dive into the GDP breakdown is also important. Around 80% of 3Q’s growth strength was thanks to a substantial upswing in the overall manufacturing sector. After two quarters of declines, Singapore’s manufacturing has finally started to revive. More importantly, it is encouraging to see broad-based growth across major sub-sectors, particularly in semiconductors and pharmaceuticals, but some of them are volatile in nature. Unlike the booming manufacturing sector, it is a rather mixed picture for services. While traderelated services have been benefitting from the trade upcycle and travel-related services continue to be resilient, some consumer-oriented sectors have softened. The labour market is also a crucial consideration when the Monetary Authority of Singapore (MAS) assesses the health of the overall economy. Fortunately, the labour market has remained resilient, albeit showing initial cooling signs. All in all, we recently upgraded our growth forecast to 3.7% (previously 3.0%) for 2024 and maintain our 2025 growth forecast at 2.6% The good news does not stop at growth; inflation has also seen progress. Core inflation decelerated to 2.1% y-o-y in October, thanks to the broad-based cooling of price pressures. Services inflation was the biggest contributor, while fuel and utilities costs continued to edge down after electricity tariffs were adjusted downwards. As such, we recently revised down our core inflation forecast to 2.7% for 2024 (previously 2.8%), but keep our 2025 forecast unchanged at 1.9%. Despite cooling inflation, we do not believe this will prompt the MAS to ease in January. In the October meeting, the MAS sounded less committed to its current monetary policy but made no commitment to a potential change of monetary policy in 2025 either. After all, there is still uncertainty as the market waits for more clarity on concreate policy in President-elect Trump’s second term. Electronics NODX continues to show strong growth, despite recent moderation Source: CEIC, HSBC Singapore continues to see good disinflation progress Source: CEIC, HSBC Thailand Fiscal muscle Pistons are cranking and the engines are revving. For the Thai economy, that is. After a weak recovery in 2023, 3Q24 growth in Thailand accelerated to 3.0%, which is the second consecutive quarter that growth surprised on the upside. Thailand’s export engine is finally up and running, growing 9.5% y-o-y on average over the past four months. Domestic demand in mainland China has picked up slightly while importers across the globe are frontloading their purchases to shield themselves from tariff risks. Thailand’s tourist arrivals also continued to improve. And, most importantly, the economy’s fiscal engines are finally revving after a dismal performance. The FY24 budget was only passed in April, which was six months into the fiscal year. As a result, the government backloaded all its spending in 3Q24, ending with the first phase of the Digital Wallet Scheme, a week before the fiscal year ended. On 25 September 2024, the government handed out THB10,000 in cash to 14.5 million low-income and disabled citizens – a stimulus that is likely to be felt in October. That being said, we expect growth in 4Q24 to accelerate to as high as 4.1% y-o-y. But headwinds persist in 2025. Thailand’s household debt (which is the highest amongst uppermiddle income economies), stands at 89.6% of GDP, and is likely to be a major drag on private consumption. Manufacturing is also exhibiting signs of weakness with banks reluctant to provide credit for automobile purchases and with manufacturers facing tough competition from mainland China and ASEAN peers. Like Vietnam and Malaysia, the economy is also highly exposed to tariff risks given its dependence on trade and how important Chinese components are to Thai exports. If nothing is done, growth in 2025 could slow down to 2.5-3.0%. But that is not what we expect. This is because policy uncertainty has finally abated with the FY25 budget passed. Here, THB186bn was earmarked for the second and third phases of the Digital Wallet Scheme. Although this is only a part of the THB300bn remaining for the scheme, the government is determined to implement the programme in full by the first half of the year (The Nation, 20 November 2024). We expect the fiscal push to bump full-year 2025 growth to as high as 3.3%. However, we do not expect monetary policy to follow suit. With growth being lifted via fiscal levers, we expect the Bank of Thailand to keep its monetary stance steady at 2.25%. Exports finally turned the corner, as exporters frontload their sales Source: CEIC, HSBC We expect the fiscal deficit to roughly match the levels seen during the pandemic Source: CEIC, Macrobond. 2025 and 2026 deficits are HSBC forecasts. Vietnam Crunch time Vietnam continues to lead growth in ASEAN. Its growth saw a notable upside surprise in 3Q24, accelerating to 7.4% y-o-y from 6.4% in 1H24. Despite facing challenges from Typhoon Yagi in September – the strongest storm Vietnam has faced in 70 years – growth remains strong thanks to robust trade performance. What is more encouraging is the breadth of the trade recovery. Albeit starting with consumer electronics, other major shipments, including textile and footwear, machinery, and agriculture products, have all seen stellar growth. Despite uncertainties in the outlook for global trade, a healthy momentum in export growth is expected to continue over the near term. However, a notable uplift in the domestic sector has not occurred yet. Cognizant of the relatively subdued domestic momentum, the government has approved another extension of the 2% value-added tax (VAT) cut to June 2025, originally set to expire at the end of 2024. That being said, domestic conditions are improving, albeit gradually. Real estate sentiment and credit growth continue to recover, while the increase in manufacturing activity is expected to eventually filter through to the job market and household income with greater intensity. We forecast GDP growth of 7.0% for 2024 and 6.5% for 2025. That being said, we are mindful of the trade headwinds from potential tariff policies from the US. The National Assembly has set a GDP growth target of 6.5-7% for 2025, but recently Prime Minister Pham Minh Chinh said the government will strive for growth of c8% (Bloomberg, 2 December 2024). Outside of growth, inflation remains comfortably under the State Bank of Vietnam’s (SBV) 4.5% target ceiling as underlying price pressures remain subdued. The recent moderation in global energy prices have also been favourable for Vietnam. We expect inflation to remain benign through our forecast horizon, and we kept our inflation forecasts at 3.6% for 2024 and 3.0% for 2025, respectively. However, currency developments will require close monitoring, with our expectations that the SBV will remain prudent and hold its policy rate throughout 2025. Export growth has normalised at a healthy pace Source: CEIC, HSBC ASEAN’s FDI inflows accounted for the lion’s share of Vietnam’s FDI in 2024 Note: ASEAN4 = Malaysia, Philippines, Singapore, and Thailand. *2024 is as of September. Source: CEIC, HSBC https://www.hsbc.com.my/wealth/insights/market-outlook/asean-in-focus/2025-q1/

2024-12-23 07:04

Key takeaways The Fed cut rates as expected at its December meeting but the FOMC’s revised projections unsettled markets. Upward revisions to inflation resulted in the removal of two rate cuts in 2025 – the Fed now expects to reduce the funds rate by 0.5% next year, rather than 1%. Stock markets in emerging and frontier economies have delivered a broadly positive performance in 2024 – but Q4 has been difficult. In recent weeks, China’s longer-dated government bond yields have fallen below those of Japan, in a historic shift that reflects significant developments in both economies. Chart of the week – Asset class performance in Q4 The story of investment markets in 2024 has been dominated by the course of disinflation and the global rate-cutting cycle. Last week’s sell-off in global stocks on a more hawkish Fed outlook showed how hyper-sensitive markets are to disappointing macro news. But Q4 has delivered some extra twists and turns, including the outcome of the US presidential election. The result raised uncertainty over future US policy, spurred strong moves in global risk assets, and drove a rally in the US dollar. It even got some credit for a surge in the price of cryptocurrencies. In stocks, the strongest momentum has been in US large caps, especially in tech-related sectors. Despite last week’s moves, the S&P 500 is still up in Q4 (and up by more than 20%+ this year). Growth has thrived while value has lagged. But it was emerging market equities – which have been strong in 2024 – that felt the most pain in Q4 (see Page 2). In fixed income, the potential for inflationary policy and higher-for-longer rates saw US Treasury yields rise. In credit, High Yield and ABS were more muted in Q4 (but have been strong in 2024 overall). Meanwhile in alternative assets, Q4 was weak but diversifiers like hedge funds, private credit, and real estate are on course to finish the year positively. So, what comes next? We think that active fiscal policy, trade uncertainty, and geopolitical tensions may cause volatility and could leave investors ‘spinning around’ in 2025. And despite the moves in Q4, there is scope for performance to broaden out to developed markets beyond North America, as well as emerging and frontier markets next year (see Market Spotlight). Market Spotlight Some investor questions for 2025 Overall market returns in 2024 are on track to be very solid. The good news for investors heading into next year is that global growth remains resilient, AI is driving revenue growth (and economic productivity), and central banks are still expected to cut rates. But could signs of inflation persistence force a more gradual easing path? This would pose obvious challenges to market performance, reflected in last week’s Fed-induced market wobble. The most expensive parts of the market (US tech) – which look priced for perfection – could be vulnerable, especially if profits disappoint. If the US market starts to struggle, can other regions take the lead? Many markets outside of the US benefit from favourable valuations and improving profit growth. But for most EMs, a lot will depend on the course of the US dollar, the potency of China policy easing, and developments around trade policy. And for Europe, can the politics tilt in a more investor-friendly direction? Fiscal policy developments in France and Germany will be important. Finally, could a pickup in market volatility support the performance of defensive sectors - healthcare, staples, utilities – that have lagged this year? With these sectors also acting as “bond proxies”, the direction of rates will also matter. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 20 December 2024. Lens on… A shallower slope for cuts The Fed cut rates as expected at its December meeting but the FOMC’s revised projections unsettled markets. Upward revisions to inflation resulted in the removal of two rate cuts in 2025 – the Fed now expects to reduce the funds rate by 0.5% next year, rather than 1%. Chair Powell noted that following a sticky patch in recent months, evidence that inflation was again moving towards target would be needed before the Fed sanctions another cut. A pause in early 2025 looks likely. Treasury yields jumped by over 0.1% and the USD hit its highest level since 2022 as markets moved to price in a slower pace of policy easing. But the biggest move came in equities – the S&P 500 fell 3% on the day. The market is now pricing in a very shallow slope for policy easing – only 1-2 cuts in 2025. Combined with significant Treasury issuance, this has pushed the 10yr yield back above 4.50%. This maintains a solid income component for fixed income investors. And on a cyclical basis, if inflation were to decline more quickly than expected – possible given its hitherto bumpy path – or growth disappoints, Treasury yields could fall back. EM stocks this quarter Stock markets in emerging and frontier economies have delivered a broadly positive performance in 2024 – but Q4 has been difficult. In part, recent weakness is down to the headwind of a resurgent US dollar, which has rallied since early October. Concerns over higher-for-longer US rates and heightened trade tensions have added to the woes. These factors have complicated an already challenging domestic backdrop for Latam countries like Brazil. And together with a weak profits outlook, that led to a big decline for the region’s stocks in Q4. Policy uncertainty has also dragged on markets in EM ASEAN, where financial stocks (which have a high weighting in regional indices) have weakened. Mainland Chinese stocks have also lost ground in Q4. But year-to-date, mainland China, together with Taiwan and India, remains among the strongest EM performers this year. Even excluding mainland China, the benefit of idiosyncratic trends and strong structural growth stories have helped broader EM, Asia, and Frontier stock universes to perform well in 2024. Trading places In recent weeks, China’s longer-dated government bond yields have fallen below those of Japan, in a historic shift that reflects significant developments in both economies. The global inflation shock boosted Japanese nominal GDP and appears to have triggered a “virtuous cycle” in wages and prices. While the BoJ opted not to hike at its December meeting, markets expect 0.4%-0.5% of tightening in 2025. This move away from deflation, the expectation of gradual policy normalisation, and higher US Treasury yields, have combined to push longer-dated Japanese yields higher. In contrast, Chinese bond yields have trended lower since the pandemic, reflecting a period of weak inflation, lingering growth concerns, and ongoing PBOC easing expectations. December’s Politburo meeting called for “moderately loose” monetary policy, pointing to further rate cuts. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and not guaranteed in any way. Diversification does not ensure a profit or protect against loss. Source: HSBC Asset Management. Macrobond, Bloomberg, Datastream. Data as at 7.30am UK time 20 December 2024. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 23 December 2024. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Market review The US Fed lowered rates by 0.25% last week, but a more hawkish outlook from the FOMC caused a spike in market volatility, with government bond yields moving higher and risk assets selling off. US 10yr Treasuries jumped above 4.5% – their highest level since May – in response to revised rate expectations, with the US dollar also rallying against a basket of major currencies. In stocks, the S&P 500 led global indices lower mid-week, with the small-cap Russell 2000 falling sharply, and Europe’s Stoxx 600 index also losing ground. In emerging markets, China’s Shanghai Composite withstood the worst of the volatility with only modest declines, while India’s Sensex, Brazil’s Bovespa and Mexico’s IPC all saw sharper losses. In commodities, the WTI oil price was down modestly through last week, while gold and copper prices also fell. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/2024-12-23/

2024-12-20 12:02

Key takeaways The UK economy contracted again in October … …and higher wage growth and inflation stoked stagflation fears. Bank of England left Bank Rate unchanged but placed more weight on the weak activity data. Source: HSBC A sombre mood to end 2024 As expected, the UK economy has seen a resurgence of some old fears – reaccelerating inflation and slowing economic growth – in what may feel like a nightmare before Christmas for policymakers. For a second consecutive month, the economy contracted in October by 0.1% m-o-m, driven by broad-based weakness across all three sectors: services, industrial production, and construction. Indeed, that means growth for Q4 has started on soft footing, although activity surveys still pointed to expansion in November and December. We now expect the UK economy to grow 0.1% q-o-q in Q4 and by 0.8% overall in 2024, while the Bank of England expects 0.0% Q4 growth. In contrast, momentum in private sector wage growth reaccelerated to 5.6% 3m/3m annualised in October while the headline rate of inflation rose to 2.6% in November. However, we judge these prints to be less worrisome than they seem at first glance. To some degree, both were driven by base effects while inflation was impacted by higher motor fuel and tobacco duty announced in the October Budget. More positively for inflation, services price inflation held steady at 5.0% and broader labour market metrics have pointed to a continued slowing in labour demand. Surveys showed firms opting to not replace voluntary leavers, vacancies continued to fall, and surveyed pay expectations for 2025 remain at 4.1%. At its latest meeting the Monetary Policy Committee (MPC) saw the labour market as broadly in balance – suggesting that the Committee thinks the labour market is no longer placing upward pressure on inflation. Three turtle doves Those challenging data dynamics, and uncertainty ahead, were reflected in the 6-3 vote split from the MPC which opted to keep the Bank Rate on hold at 4.75% at the latest policy meeting. The three members who voted for a rate cut cited that current high interest rates were restricting activity, while another member saw the possibility of a more activist (faster) approach if activity data continued to disappoint. Bank Rate has been reduced by 0.5ppt in 2024 and markets expect only a further 0.5ppt drop in 2025. However, we think the MPC, at least for now, sticks with a stance whereby it cuts the Bank Rate by 0.25ppt cut per quarter. And from mid-2025, we think that pace of cuts can pick up, with Bank Rate ending next year at 3.25%. Ultimately, the speed of rate cuts in 2025 will depend on the balance of risks – specifically, the risk of fiscal policy changes helping keep inflation sticky, versus the possibility of persistent weak demand and continued labour market loosening. https://www.hsbc.com.my/wealth/insights/market-outlook/uk-in-focus/2024-12/

2024-12-20 08:06

Key takeaways As expected, the Federal Reserve cut the Fed funds rate by 0.25% to a range of 4.25 - 4.50%. However, its economic and rate projections, the meeting statement and Mr. Powell’s press conference were all more hawkish than expected. The Fed surprised markets as it now projects to cut rates only two times next year, as opposed to the four times it had forecasted in September. We now forecast a 0.25% rate cut at its March, June and September policy meetings in 2025. Fixed income returns could remain more muted and volatile given the reduction in rate cuts we expect, and the likely volatility in rate assumptions as we get more economic data and clarity about the policies of the next administration. When the dust settles, our view is that yields will be lower. The fundamentals remain constructive for US equities. Given the strong economy and secular drivers of profit growth, volatility could create an opportunity. However, with a less aggressive Fed easing cycle, the upside clearly has to come from earnings, not valuation multiples. The good news is that earnings expectations – especially outside of the Magnificent 7 – are low, providing a low bar to exceed. What happened? As expected, the Federal Reserve cut the Fed funds rate by 0.25%, taking the Fed funds rate range to 4.25 - 4.50%. However, for 2025, the Fed now projects to cut rates only two times, as opposed to the four times it had earlier forecasted in September. The FOMC has made it clear that they will ease more slowly, extending the Fed easing cycle into 2027. As per Summary of Economic Projections (SEP), inflation is expected to accelerate in 2025 to 2.5% from 2.4% in 2024. Moreover, the FOMC believes inflation risks are now more skewed to the upside. It now believes to achieve its 2% target in 2026, as opposed to 2025 that it forecasted at its September meeting. Median of the FOMC economic projections, December 2024 Source: Bloomberg, HSBC Global Private Banking and Wealth as at 18 December 2024. The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. Balance sheet reduction should continue as the FOMC will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The FOMC reported, “Recent indicators suggest that economic activity has continued to expand at a solid pace. Labour market conditions have generally eased, and the unemployment rate has moved up but remains low.” The SEP points to even faster, and above-trend economic growth. “Inflation has made progress towards the Committee's 2 percent objective but remains somewhat elevated”. The SEP points to elevated inflation, which can take longer to achieve its target inflation range. Changes were made to the FOMC forecasts, mostly reflecting the reality of faster economic growth and stickier inflation. Market-implied Fed policy expectations for 2025 Source: Bloomberg, HSBC Global Private Banking and Wealth as at 18 December 2024. Significantly, the FOMC changed its outlook for 2025 for the Fed funds rate. It now forecasts only 0.5% of further easing in 2025 as opposed to the 1% of easing it expected in September. For 2026, they kept a similar profile of rate cuts, reducing the Fed funds rate by 0.5%. Then in 2027, they have now included another 0.25% rate cut, taking the longer-term Fed funds rate to 3%, which is similar to their September forecast. We forecast 0.75% of rate cuts from the Fed in 2025, delivered in 0.25% steps at the March, June and September policy meetings. The FOMC forecast for 2024 real economic growth was revised up to 2.5% from 2.0% at the September meeting. Longer-term growth forecasts remain unchanged. Investment implications Dollar strength should continue as other central banks could ease more aggressively, causing USD to benefit from an attractive rate differential. The fundamentals remain supportive for US dollar-denominated investors. Economic growth remains healthy and well above the long-term trend. The technology revolution is just beginning and the productivity enhancing technologies that will diffuse throughout the economy should lift growth, reduce costs and expand profitability. The re-industrialisation of the US continues, and construction of new manufacturing facilities remains quite strong. Near/onshoring of jobs and the securing of supply chain remain a major theme for US corporations. This will continue to be a factor in stabilising the labour markets and creating wealth. Fixed income returns could remain more muted as rates should now fall more slowly with the extension of the monetary policy easing cycle. The fundamentals for US equities remain quite constructive. The recent fall can be a good opportunity to increase exposure. However, with a less aggressive Fed easing cycle, the slightly more hawkish tone on the monetary policy will have to be offset by increased fiscal stimulus (lower income tax rates) and better economic growth, which the Fed is forecasting. This would allow the earnings-led bull market to broaden out. From a sector perspective, interest rate relief will probably be less dramatic, and the growth imperative remains. Interest rate-sensitive sectors should see a less emphatic stimulus from lower market rates. The growth emanating from a technology revolution should be positive for the Technology, Communications Services, and Healthcare sectors. The increased demand for energy should be positive for Industrials. Lower interest rates, a positive slope to the yield curve, and less regulation should culminate in better economic growth, increased M&A and possibly more IPOs, all of which would be positive for the Financial sector. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/2024-12-19/

2024-12-19 12:02

Key takeaways The FOMC cut the US policy rate by 25bp but signaled fewer rate cuts in 2025; this likely means a “skip” in January. While the rate cut was widely anticipated, other aspects of the meeting were more hawkish than expected. We continue to look for a strong USD through 2025, a stance reaffirmed by the outcome of the December FOMC meeting. The Federal Open Market Committee (FOMC) cut rates by 25bp in their December meeting to a range of 4.25-4.50%, as widely anticipated, but other aspects of the meeting were more hawkish than expected. These included new dots projections, a new hawkish dissenter, a notable tweak to the statement, and a press conference that revealed the decision to cut today had been a close call. The USD was justifiably stronger in the wake of the meeting. The decision by the Federal Reserve to lower the policy rate by 25bp was unsurprising. In a Bloomberg survey of economists, 88% expected a 25bp cut, 10% expected unchanged policy, and an outlier 2% forecast a 50bp easing. The market was fully priced for 25bp also. However, in his press conference, Chair Powell indicated that this decision was a “close call”, suggesting the market’s near certainty may have overestimated the FOMC’s appetite for today’s cut. The accompanying statement was little changed, whether looking at the paragraph describing recent economic developments, or to the committee’s view that “the risks to achieving its employment and inflation goals are roughly in balance”. However, the statement now refers to the “extent and timing” of additional rate cuts whereas previously, it merely talked of the “extent”. Chair Powell noted that this change “signals that we are at or near a point at which it will be appropriate to slow the pace of further adjustments” (Bloomberg). The statement also revealed that the Fed’s Beth Hammack dissented from the decision to cut by 25bp, lending a somewhat hawkish footnote to the statement. The new set of dots projections adds to the less dovish tone. The median dot for 2025 was raised to 3.875% from 3.375% in the September release, higher than the median expectation of economists (Bloomberg), including HSBC’s. The Fed’s median projected path during 2025 was in line with market pricing ahead of the meeting, though the market has since repriced hawkishly. It was also shared by 10 members of the FOMC, a solid consensus. The long run dot was raised to 3.00%. Chair Powell was quizzed about whether the new dots incorporated expectations for policy change during President-elect Donald Trump’s second term. He said some FOMC members had begun to weave in possible policy changes, but others had not, and others chose not to reveal whether they had or not. His main takeaway though was that policy uncertainty is another reason for moving cautiously. Another interpretation, in our opinion, is that there may be some upside risks to the dots as other FOMC members update their forecasts in the months and quarters ahead. We retain our view of USD strength in 2025. This is still largely built on US exceptionalism, notably when compared to Europe. In 2024, that was captured in the shifts in interest rate differentials and echoed in a stronger USD. That has been evident again in the wake of the December FOMC. In 2025, other factors are also likely to play a part, including any developments in US trade policy, US deregulation, relative fiscal policy, and geopolitics. In the end, it may still come down to the data, but drivers may become more varied, and we expect the USD to remain on top. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/flash-2024-12-19/

2024-12-17 12:02

Key takeaways China’s Central Economic Work Conference suggests more proactive policy support to come, especially on consumption. Stabilising housing and stock markets, a higher fiscal deficit, and moderately loose monetary policy will help. Business sentiment may be boosted by upholding the rule of law while fierce competition may see some relief. China data review (November 2024) Retail sales softened to 3.0% y-o-y in November from a high base from last year and an earlier launch of the 11.11 Singles Day this year. Durable goods sales from the trade-in programs were robust (home appliances: 22.2% y-o-y; car sales: 6.6%%), but not enough to turn around the slowing momentum in overall retail sales. Industrial production rose by 5.4% y-o-y in November, while manufacturing investment stayed generally buoyant, up 9.3% y-o-y. Some of the improvement in manufacturing production was likely helped by an ongoing boost from trade-in programs for equipment upgrading as well as some front-loading from exporters in anticipation of increased tariffs from the US next year. Infrastructure investment (ex-utilities) lost some strength in November, up 3.3% y-o-y vs 5.8% in October, given new guidance to allow a proportion of special local government bond funding to go towards debt swaps (RMB800bn each year for the next five years). The debt swap program may be stimulative for the economy as it can put cash into the hands of enterprises and employees. CPI inflation softened to 0.2% y-o-y in November despite a low base, as supply increases weighed on food prices. Meanwhile, core CPI remained muted at 0.3% y-o-y. On the producer front, PPI inflation rose to -2.5% y-o-y amid a demand pick up for industrial products, though more time and effort may still be needed to tackle excess capacity in some sectors. Exports rose by 6.7% y-o-y in November, including by 8% to the US, partly attributed to front-loading given risks of higher tariffs next year, and by 15% to ASEAN, likely helped by supply chain shifts. However, import growth dropped to -3.9% y-o-y in November, with iron and copper ore imports down 0.9% and 8.1% y-o-y in volume terms, and the import value of crude oil down 4.7% y-o-y. China’s Central Economic Work Conference 2024: Building resolve China’s top policymakers met for the annual Central Economic Work Conference (CEWC), 11- 12 Dec, to discuss the progress on economic growth and to set policy priorities for next year. The tone echoed the stronger policy stance taken at the Politburo meeting on 9 Dec which called for “extraordinary countercyclical” measures to support growth. Policymakers noted that external pressures have risen while the domestic environment faces its own challenges. They also reiterated their resolve to meet longer-term goals of transitioning the economy. No hard figures: As expected, the CEWC didn’t set quantitative economic and policy targets for 2025, which are often unveiled during the annual Two Sessions in March. Qualitatively, the goal is to ‘maintain steady economic growth’, which suggests the growth target may not deviate much from this year’s c5%. Fiscal policy to be proactive: The CEWC continued to give clear forward guidance around fiscal policy, noting that the fiscal deficit should be widened, while also increasing the issuance of ultra-long dated special central and local government bonds. This suggests a stronger fiscal stance is likely to come through next year. More aggressive monetary policy to come through: Echoing the language from the December Politburo meeting, the CEWC called for ‘moderately loose’ monetary policy, with cuts to required reserve ratios (RRR) and interest rates to be made at the appropriate time, while liquidity should remain ample. The People’s Bank of China (PBoC) may also purchase treasury bonds in the secondary market to inject liquidity. Stepped-up support for consumption: The CEWC press release noted that ‘special actions to boost consumption’ would be taken. These include boosting support for durable goods tradein and equipment upgrading programs, enhancing social safety nets (including employment support), and increasing basic pensions and financial subsidies for medical insurance. The CEWC also pledged to protect people’s livelihood and safeguard social stability. Stabilising housing and equity markets: As policymakers now see the housing market as systemically important to the economy, more forceful measures can be expected if current policies fail to shore up the market. As for the equity market, the latest development is the expansion of the private pension scheme from pilot cities to the entire nation starting from 15 Dec, while making index equity funds and government bonds eligible pension products. Preventing ‘involutionary competition’: The CEWC mentioned that a policy priority is to“comprehensively manage involution-style competition and regulate the behaviour of local governments and enterprises”. We believe this refers to fierce competition in several sectors which has contributed to the profit margin squeeze, over-supply, and deflationary pressure. Taken together, this could mean the government will prioritise consumption support to mitigate supply-demand imbalances, before considering more decisive measures to reduce capacity. New law to boost business sentiment: The Private Economy Promotion law will be enacted to help regulate local government behaviour, particularly regarding extraterritorial and profitdriven law enforcement. The ongoing RMB10trn debt swap has, to some extent, relieved local government debt repayment pressure, and thus reduced incentives for profit-driven law enforcement, but this new law will add an important layer of protection to private enterprises. What about the potentially increasing trade tensions? In addition to more policy support for domestic demand, China is determined to stay open and plans to expand unilateral opening-up in an orderly manner. Notably, China has expanded unilateral visa-waiver programs for more countries and visa-free transit policy to more ports. The next step of opening-up may progress towards fewer restrictions on trade and investment flows. Source: LSEG Datastream * Past performance is not an indication of future returns Source: LSEG Datastream. As of 13 December 2024 market close https://www.hsbc.com.my/wealth/insights/market-outlook/china-in-focus/2024-12/