Friday Investors’ Club: Past one hurdle, but what’s next?
CIO’s Tom McLoughlin joins Wayne Gordon, Jon Gordon, and Teck Leng Tan to talk inflation, rates, FX, and US-China.

Ask Kelvin | Why the latest US CPI reinforces our September rate cut expectations
CIO’s Kelvin Tay discusses the US economy, rate cuts, and the potential impact of increased US tariffs on China.

 

Thought of the day

The rally in US equities took a slight pause on Thursday as markets continue to assess the state of the US economy amid a flurry of data this week. The S&P 500 index snapped a two-day gain after hitting a new record, and the Dow Jones Industrial Average ended lower after briefly touching 40,000 for the first time. The yield on the 10-year US Treasury edged up.

Comments from Federal Reserve officials also weighed on sentiment, as they reiterated rates may need to stay higher for longer. Cleveland Fed President Loretta Mester said holding the current restrictive stance for longer “is prudent at this point” as the US central bank gains clarity about the path of inflation. New York Fed President John Williams said he doesn’t see a reason for adjusting monetary policy now, and Richmond Fed President Thomas Barkin said “it’s going to take a little bit more time” for inflation to get to the Fed’s goal sustainably. Traders are now pricing in 1.8 cuts this year, down from two 25-basis-point cuts a day earlier.

However, while equity volatility can be expected today on the expiry of USD 2.5tr worth of options, the S&P 500 remains on track for its fourth straight weekly gain, the longest winning streak since February. The yield on the 10-year US Treasury also remains some 30 basis points lower than its year-to-date high. We continue to believe recent economic data underpin our view that a return of disinflation should allow the Fed to start easing policy later this year.

The Fed’s stance has not turned hawkish. Recent comments from Fed officials including Chair Jerome Powell have mainly focused on waiting for more evidence of inflation slowing, following stronger-than-expected data during the first quarter of this year. While both the producer and consumer price indexes this week are encouraging, it is also expected that the central bank would not act on just a few data points. Given policymakers have acknowledged current rates as sufficiently restrictive, we view recent remarks as largely a reiteration of a data-dependent Fed, and that the US central bank remains biased toward easing.

The latest data showed price pressures are easing. One major factor that contributed to uncomfortable inflation figures earlier this year is shelter, and while the month-over-month increase remains 0.4%, data on new rental leases suggest that shelter inflation will continue to slow in the months ahead. We believe this should help to bring down overall inflation. Also encouraging were softer prices in several categories in the PPI that are used to calculate the Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) price index. We believe core PCE in April should rise at the slowest rate so far this year.

Economic activity has softened amid a cooling labor market. Lower manufacturing production in April and signs of softness in several housing activity gauges added to recent signals indicating easing economic activity, including April’s retail sales that showed a flat month-over-month growth. The latest weekly initial jobless claims remained above 220,000, with April’s labor report overall softer-than-expected.

So, we continue to expect the Fed to cut rates by 50 basis points this year, with more reductions in 2025 and 2026. This creates a benign macro environment that is supportive of our investment recommendation for quality bonds and quality stocks.