Yesterday, Fed Chair Jerome Powell stated that the US is in the “early stages of disinflation but it will “take a significant period of time” as services inflation remains persistent due to a still-tight labour market.
We asked our stocks analyst Danish Lim, if he sees any shift of market sentiments after Powell’s speech and what he thinks are the major concerns of investors.
“Interest rates futures are pricing in higher terminal rates of 5.00-5.25% by May 2023, this could represent a shift in sentiment as it appears the market is finally in line with the Fed’s December Dot Plot. This is in contrast to expectations for rates to peak at 4.75-5.00% prior to Powell’s speech. It appears that market sentiment has turned less optimistic, having finally come to terms with the reality that rates are likely to stay higher for longer and that an early Fed pivot is unlikely.
However, markets are still projecting rate cuts to occur in December 2023 despite the Fed having constantly pushed back against expectations for rate cuts in 2023.
The major concern of investors would be the possibility of a long-drawn out battle against inflation which takes longer than expected to ease towards the 2% target level. This could result in the Fed hiking rates above the projected terminal rate of 5.1%. With this, investors would be concerned about the possibility of higher than expected terminal rates, as well as a later than expected rate cut resulting in a prolonged period of high interest rates.”
On which market he is bullish about this year, our analyst picked China.
He said the Chinese market is “supported by the government’s clear priority on reviving economic growth and limited signs so far of any potential COVID policy backtrack.”
At the same time, the economy appears headed toward a recovery, with the Manufacturing Purchasing Manager’s Index (PMI) rising more than expected to 50.1 from 47.0 in the prior month. The Non-Manufacturing PMI also jumped from 41.6 to 54.4.
As for which sector our analyst expects to outperform this year, he said he “favours cyclicals such as the consumer and tourism sector.”
Explaining why, he said “Chinese President Xi Jinping recently called for further efforts to boost consumption and enable people to “spend without worrying about the future”. According to the Ministry of Culture and Tourism, around 308M people travelled for leisure during the Lunar New Year, reaching around 88.6% of pre-pandemic levels. Additionally, Chinese households are sitting on large pools of excess savings, with Data from the People’s Bank of China (PBOC) showing that renminbi (RMB) household deposits surged by a record RMB 17.84 trillion ($2.6 trillion) in 2022, up from RMB 9.9 trillion in 2021. Other positive developments for the tourism sector would be Hong Kong removing PCR tests for border crossing with mainland China from 6 Feb onward.”
“We expect consumers to deploy this pool of excess savings as they engage in “revenge spending” once the economy fully reopens. Consumer spending will be supported by relatively low inflation compared to the rest of the world, with China’s Consumer Price Index (CPI) rising by 1.8% in December 2022, up from 1.6% in the previous month, but still well below its official target of around 3%.”
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