Weekly Financial Market Analysis: 15/04/2024 (U.S Inflation and China Q1 GDP Growth)
Weekly Financial Market Analysis: 15/04/2024 (U.S Inflation and China Q1 GDP Growth)
Writer: Klinsmann Lee
US Fed reset interest rate cut expectation after hotter-than-expected inflation data. [1]
Background:
The U.S. dollar has appreciated 4.75% against a basket of currencies.
A series of hotter-than-expected inflation data has reset U.S. Federal Reserve rate-cut expectations.
As the U.S. is expected to keep its interest rate higher for longer, it forces Central Banks worldwide to tailor their rate-cut plans to avoid weakness in their currency.
New York Fed President John William has noted that there is no urgency to cut interest rates given the strength of the economy.
Klinsmann’s Analysis:
A depreciating currency is often beneficial for a country’s exports (it is cheaper to purchase the country’s goods and drive demand). This benefits the country’s GDP growth.
A depreciating currency also means it is more costly to import goods from overseas (I need more domestic currency to buy the same amount of goods now). This creates higher inflation for the country.
It is important that Central banks conduct monetary policies that do not undermine the price stability in their own countries, in addition to factoring the interest rate in the U.S.
The higher-than-expected U.S. inflation data is problematic for smaller debt burden economies – the higher U.S. interest rate means both higher borrowing costs and more disruptive swings in their currencies.
As U.S. inflation has proven sticky, I think there will be further adjustments to the number of interest rate cuts this year. Central Bank around the world faces a tradeoff to either avoid depreciating the domestic currency (not cutting their interest rate) or stimulating their local economy (cutting interest rate).
China’s Q1 GDP growth of 5.3%, faster than expected. [2]
Background:
Analysts’ forecast in a Reuters poll on China’s Q1 GDP growth is 4.6%.
China has set a GDP growth target of around 5% for 2024.
Disappointing factory output and retail sales underline persistent weakness in domestic demand.
Industrial output in March grew 4.5% from a year earlier, below the market forecast of 6.0%.
Retail sales in March grew 3.1% from a year earlier, below the market forecast of 4.6%.
This continues to reflect the underlying weakness in China’s economic fundamentals driven by property downturn, rising local debt and weak consumer spending.
China is expected to provide further support to the economy through further cuts in the bank’s reserve requirement ratio and interest rate. However, this is limited compared with direct stimulus.
Klinsmann’s Analysis:
The positive GDP data offers some optimism on the surface. However, China’s economy continues to face fundamental problems that will take time to solve.
In the process of deleveraging, China’s policymakers also face limited tools to support the economy. For example, direct spending on infrastructure will raise public finance which is a problem given the already high local government debt.
Through the weak consumer data, we can see that flows of credit, driven by lower bank reserve requirement ratio and interest rate, are flowed to production rather than into consumption. This has a weaker effect on stimulating the overall economy.
The question to consider is whether there is “momentum” to continue this GDP growth into the next quarter.
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