FED and BOJ’s policy change may be made later than market expectation; China’s risk of deflation is rising amid ongoing real estate crisis
US
Stronger-than-expected inflation and labor markets may affect timeline for Fed rate cuts. In December, headline Consumer Price Index (CPI) rose 3.4% YoY and 0.3% MoM, up from respectively 3.1% and 0.1% a month earlier. Core CPI rose 3.9% YoY and 0.3% MoM, compared to November’s 4.0% and 0.3%. At the same time, headline Producer Price Inflation rose to 1.0% YoY from 0.8% in November, though Core Producer Price Inflation cooled slightly from 2.0% YoY to 1.8%.
December’s CPI print came in higher than market expectation, and coupled with continuing strength in both consumption and labor markets, it now appears less likely that the Fed will announce a rate cut at its March meeting. This outcome has been underscored by a recent statement by the bank that has underlined officials’ commitment to keeping monetary policy tight until there are clear indications that inflation has dropped back to the Fed’s 2% target for the long term. We therefore expect that the Fed will continue with a target Fed Funds Rate of 5.25-5.50% through to mid-2024, with rate cuts then possible at the start of Q3, though this has to be set against the risk that intense geopolitical tensions in the Middle East may reignite inflationary pressures.
Japan
The recent earthquake and the continuing risk of recession reduce chance for the BOJ to abandon negative interest rates in Q1. Household expenditure contracted for the 9th month in November, by -2.9% YoY alongside the 20th month of declines in real wages, which were down -3.0% YoY. December headline inflation also dropped from 2.7% YoY to 2.4% and core inflation cooled from 2.3% to 2.1%.
Japan is at growing risk of having slipped into recession in Q4 of 2023. (i) Wage increases have failed to keep pace with inflation and so real wages are dropping and domestic spending power is eroding. (ii) Sluggishness in the economies of trade partners is weighing on export earnings. (iii) Momentum is dissipating in both the manufacturing and service sectors. In addition, the earthquake in the center of the country at the start of the year has disrupted production and the government may have to make additional payments to cover the cost of recovery. With the immediate outlook unfavorable, we expect that rather than the Q1 changes, the BOJ may delay abandoning its negative interest rate policy until Q2 as it waits to evaluate the impacts on the economy of the earthquake.
China
The risk of deflation is rising in China, and the election result in Taiwan will likely extend geopolitical tensions. December’s Consumer Price Index slipped -0.3% YoY, its 3rd month of declines, though the services component edged up to 1% YoY alongside PMI prints that remained in expansionary territory in December (Official: 50.4, Caixin: 52.9). However, the Producer Price Index slipped -2.7% YoY, though this is improving from the -5.4% YoY seen in June, its lowest in many years. At the same time, as expected, the DPP’s Lai Ching-te, the current Vice-President, has won the Taiwanese presidential election with 40.05% of the vote, though with 51 seats from a total of 113, the DPP failed to secure a majority in the legislature.
The slide in both consumer and producer price indices reflects the combination of weak demand and excess supply, and this is raising the risk of deflation in China which may become a so-called ‘Japanification’. Alongside this, the victory of the DPP’s Lai Ching-te in the Taiwanese presidential election is likely to sustain China-Taiwan tensions. However, the DPP's inability to secure a majority in parliament is likely to hinder their efforts to reduce economic dependence on China, given the opposing stance held by the KMT and the TPP, particularly regarding the resumption of trade agreement talks with China.
Consumption is helping to drive growth through the start of 2024. The Council of State has warned that borrowing bill to fund the Digital Wallet scheme must adhere strictly to the law.
Recovering consumer sentiment coupled with government policy measures should support spending growth through the beginning of the year. The Consumer Confidence Index strengthened for the 5th month in December, rising from 60.9 in November to a 46-month high of 62.0 on the positive effects of the new government taking power and introducing a number of stimulus packages, as well as its actions to address problems with the cost of living, principally through measures targeting the price of electricity and transport fuels. However, consumer sentiment continues to be undercut by domestic worries over the drought and the potential impacts of this on agricultural yields, and international uncertainty over the world economy. The latter is being driven by both tensions in the Middle East that may yet worsen and the tightness of monetary policy, which may drag on the global outlook and impact the Thai export sector.
Consumption is expected to continue to grow through the start of the year, helped by rising consumer confidence and strengthening labor markets, which with unemployment rate at just 1% are now back to close to its pre-Covid level of health. In addition, the tourism sector is benefiting from the introduction of Visa-Free travel for some arrivals. Also, the government’s ‘Easy-E-Receipt’ scheme is initially expected to inject THB 70 bn into the economy, thus adding 0.18% to GDP (this allows tax payers to reclaim tax on spending on goods and services worth up to THB 50,000 between 1 January and 15 February, 2024). The government has also extended assistance with the cost of living by targeting energy prices, and so the THB 30/liter price cap on diesel has been extended to the end of March, and electricity tariffs for those using fewer than 300 units per month have been kept at THB 3.99/unit for bills issued between January and April.
The outlook for the government’s Digital Wallet policy looks uncertain following the recent comment by the Council of State. The Secretary General of the Council has said that plans to borrow THB 500bn must abide by sections 53, 6, 7 and 9 of the State Fiscal and Financial Disciplines Act of B.E. 2561 (2018).
The government planned to make payments of THB 10,000 to around 50m individuals in May but this is now uncertain and it is not clear how the Digital Wallet Committee will respond to the Council of State’s comments. In addition, the legislation required for the additional borrowing still has to be discussed by MPs and senators, and potentially to be considered by the Constitutional Court.
