Tao Dong is a Director of the China Chief Economist Forum, Managing Director of Credit Suisse and Senior Advisor of Private Banking in Asia Pacific
U.S. PCE inflation has broken the tranquility of the rivers and lakes, and inflation trading has reappeared. In the United States, the US core PCE rose 4.7% in May, and inflationary pressures rose instead of decreasing, greatly surprising the market, and the strong data of the past two weeks was also re-emerged, confirming that the US economy is still overheated. Prices in the futures market indicate that the probability that the Fed will have to raise the rate by another 25 points at the June meeting rose from 18% to 69% in a week; The two-year Treasury interest rate also climbed nearly 20 points in a week, and the dollar rose sharply. Nasdaq led U.S. stocks higher, while Eurasian stocks diverged. The UK CPI eased sharply to 8.7% in April, but inert inflationary pressures remain high. GDP growth in the German economy was revised to -0.3% in the first quarter, Europe's largest economy fell into recession, and sluggish consumption and industrial production dragged down Germany. The renminbi exchange rate fell below 7.06. Fitch downgraded its sovereign credit rating outlook for the United States to "negative."
Inflation in the United States heated up again in April. PCE inflation rose 4.4% y/y and core PCE rose 4.7% y/y, both of which were significantly higher than expected. The Fed's most concerned supercore PCE (minus rent and energy price inflation) has recorded its biggest increase so far this year. This is a key digital rebound that greatly increases the likelihood of another rate hike by the Fed at its June 13-14 meeting.
In the face of still hot inflation data, the market has re-examined the ultimate interest rate level and the future path of interest rate cuts. The interest rate futures market now implies a 69% probability, with the federal rate rising another 25 points in June and the policy rate falling back to 5% at the end of the year, which means that there may be a two-yard cut in the second half of the year (a four-yard cut was expected two weeks ago). The interest rate on two-year government bonds, which is most sensitive to policy rates, rose to 4.6 per cent, compared with 3.7 per cent at the beginning of the month. Large price fluctuations indicate that this is a rather strong change in expectations.
Based on the latest inflation data, and with reference to GDP data, business investment data, real estate sales data and personal consumption data, the author revised the forecast for the Fed's interest rate policy, and now expects a 25-point rate hike at the June 13-14 meeting, and whether to raise interest rates in July depends on future ISM, non-farm payrolls and core inflation data. ISM and non-farm payrolls data are more important because the real economy does not cool down, and inflation cannot come down. The June meeting continues to raise interest rates on the premise that the debt ceiling issue will be resolved by then and there will be no major turmoil in financial markets.
The RMB exchange rate against the US dollar has recently broken several thresholds, and the onshore exchange rate has depreciated to 7.06, which has attracted the attention of many people. First of all, it is stated that this is mainly due to the appreciation of the United States dollar. Over the past month, the onshore yuan has depreciated by 1.8% against the dollar, while the euro has lost 2.7% against the US dollar, the yen by 4.3% and the pound by 1.1% over the same period. Therefore, this is a dollar action, not a yuan action. The dollar's recent sudden strengthening is mainly due to the market's wavering expectations that the Fed will pause interest rate hikes, which has stampeded the already crowded bearish dollar trading.
Compared with other major currencies, the RMB exchange rate is relatively stable. One is that China has a huge trade surplus, and the other is that the exchange rate trend is affected by policy, but Chinese is more sensitive to the fluctuations of the renminbi exchange rate than other countries. The weakening of the renminbi exchange rate is actually a supplement to last year's relatively stable decline. Last year, the renminbi was more stable than the euro, the pound sterling and the yen. The future trend of the RMB exchange rate depends on the relative trend of the Chinese economy with the economies of the United States, Europe and Japan, People's Bank of China the policy of the US Federal Reserve, the European Central Bank and the Bank of Japan.
The author believes that China needs to further ease monetary policy and improve the efficiency of credit expansion, and the timing is estimated to be faster than that of the United States and Europe. If the depreciation of the exchange rate helps break the deflationary mentality, allowing the RMB exchange rate to depreciate a little more is a reasonable countercyclical macro policy.
There are three market highlights this week, 1) US non-farm payrolls data, which is expected to add 200,000 jobs. Rising jobs and wages are important for whether the Fed continues to raise interest rates. 2) US debt ceiling negotiations and follow-up, and 3) Eurozone CPI are expected to slide rapidly to 6.4%, although core inflation remains hovering at 5.4%. China's May PMI should also pay attention. U.S. PCE inflation has broken the tranquility of the rivers and lakes, and inflation trading has reappeared. In the United States, the US core PCE rose 4.7% in May, and inflationary pressures rose instead of decreasing, greatly surprising the market, and the strong data of the past two weeks was also re-emerged, confirming that the US economy is still overheated. Prices in the futures market indicate that the probability that the Fed will have to raise the rate by another 25 points at the June meeting rose from 18% to 69% in a week; The two-year Treasury interest rate also climbed nearly 20 points in a week, and the dollar rose sharply. Nasdaq led U.S. stocks higher, while Eurasian stocks diverged. The UK CPI eased sharply to 8.7% in April, but inert inflationary pressures remain high. GDP growth in the German economy was revised to -0.3% in the first quarter, Europe's largest economy fell into recession, and sluggish consumption and industrial production dragged down Germany. The renminbi exchange rate fell below 7.06. Fitch downgraded its sovereign credit rating outlook for the United States to "negative."
Inflation in the United States heated up again in April. PCE inflation rose 4.4% y/y and core PCE rose 4.7% y/y, both of which were significantly higher than expected. The Fed's most concerned supercore PCE (minus rent and energy price inflation) has recorded its biggest increase so far this year. This is a key digital rebound that greatly increases the likelihood of another rate hike by the Fed at its June 13-14 meeting.
In the face of still hot inflation data, the market has re-examined the ultimate interest rate level and the future path of interest rate cuts. The interest rate futures market now implies a 69% probability, with the federal rate rising another 25 points in June and the policy rate falling back to 5% at the end of the year, which means that there may be a two-yard cut in the second half of the year (a four-yard cut was expected two weeks ago). The interest rate on two-year government bonds, which is most sensitive to policy rates, rose to 4.6 per cent, compared with 3.7 per cent at the beginning of the month. Large price fluctuations indicate that this is a rather strong change in expectations.
Based on the latest inflation data, and with reference to GDP data, business investment data, real estate sales data and personal consumption data, the author revised the forecast for the Fed's interest rate policy, and now expects a 25-point rate hike at the June 13-14 meeting, and whether to raise interest rates in July depends on future ISM, non-farm payrolls and core inflation data. ISM and non-farm payrolls data are more important because the real economy does not cool down, and inflation cannot come down. The June meeting continues to raise interest rates on the premise that the debt ceiling issue will be resolved by then and there will be no major turmoil in financial markets.
The RMB exchange rate against the US dollar has recently broken several thresholds, and the onshore exchange rate has depreciated to 7.06, which has attracted the attention of many people. First of all, it is stated that this is mainly due to the appreciation of the United States dollar. Over the past month, the onshore yuan has depreciated by 1.8% against the dollar, while the euro has lost 2.7% against the US dollar, the yen by 4.3% and the pound by 1.1% over the same period. Therefore, this is a dollar action, not a yuan action. The dollar's recent sudden strengthening is mainly due to the market's wavering expectations that the Fed will pause interest rate hikes, which has stampeded the already crowded bearish dollar trading.
Compared with other major currencies, the RMB exchange rate is relatively stable. One is that China has a huge trade surplus, and the other is that the exchange rate trend is affected by policy, but Chinese is more sensitive to the fluctuations of the renminbi exchange rate than other countries. The weakening of the renminbi exchange rate is actually a supplement to last year's relatively stable decline. Last year, the renminbi was more stable than the euro, the pound sterling and the yen. The future trend of the RMB exchange rate depends on the relative trend of the Chinese economy with the economies of the United States, Europe and Japan, People's Bank of China the policy of the US Federal Reserve, the European Central Bank and the Bank of Japan.
The author believes that China needs to further ease monetary policy and improve the efficiency of credit expansion, and the timing is estimated to be faster than that of the United States and Europe. If the depreciation of the exchange rate helps break the deflationary mentality, allowing the RMB exchange rate to depreciate a little more is a reasonable countercyclical macro policy.
There are three market highlights this week, 1) US non-farm payrolls data, which is expected to add 200,000 jobs. Rising jobs and wages are important for whether the Fed continues to raise interest rates. 2) US debt ceiling negotiations and follow-up, and 3) Eurozone CPI are expected to slide rapidly to 6.4%, although core inflation remains hovering at 5.4%. China's May PMI should also pay attention.
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