FOMC adjusts new rate forecast lower. EU hits Chinese EVs with new tariffs. Retaliation by China may trigger greater global trade protectionism
US
As anticipated, the Fed held rates unchanged, while FOMC expected 1-2 rate cuts this year, compared to 3 cuts previously. In May, headline and core inflation inched down from 3.4% YoY to 3.3% and 3.6% to 3.4%, respectively. Headline and core producer price inflation also slipped from 2.3% YoY to 2.2% and 2.5% to 2.3%, respectively. In addition, initial jobless claims rose to a 10-month high of 242,000 in the previous week.
The FOMC is now predicting (via Dot Plot) that it may make 1-2 rate cuts this year. Indicators for economic growth and inflation are showing more sign of slowdown, including: (i) May’s ISM Manufacturing PMI falling for the 3rd consecutive month to post a further contraction; (ii) job openings per unemployment ratio dropping to 1.24, close to its pre-Covid level; (iii) slower-than-expected consumer and producer price inflation; and (iv) the fall in consumer confidence index to a 6-month low in May. Given the cooling economy and limited upside risk of inflation, we still see the Fed to deliver two rate cuts the rest of this year.
Europe
The EU announced plan to impose new tariffs on Chinese EVs from 4 July, duties on these will rise from 10% to up to 48.1%. The new tariff regime imposed by the European Union (EU) aims to protect EU car manufacturers from the impact on sales within the bloc of unfair subsidies made to Chinese EVs. Alongside this, Eurozone economic indicators have softened, with industrial production performing worse than expected with a contraction of -0.1% MoM and -3.0% YoY in April, compared to March’s +0.5% MoM and -1.2% YoY, respectively.
China is a major trade partner for the EU, soaking up 10% of all exports from the bloc and accounting for 23% of all EU imports (or 1.4% and 3.9% of EU GDP as of 2022). Thus, any tariff retaliation by China could have significant impacts on European industry, particularly in any parts of the economy that are targeted by China. Moreover, in addition to the possible effects of a trade war on the cost of imports and through this on prices overall, ongoing worries over inflation and wage growth may encourage the European Central Bank (ECB) to exercise greater caution over making rate cuts in the second half of the year. We still expect the ECB will make two further reductions in policy rates before the end of 2024.
China
China hopes the EU to reconsider moves against Chinese EVs, while indicators reflect the weakness of recovery in domestic demand. The EU’s decision to hit Chinese EVs with punitive tariffs, which will come into effect on 4 July, was the outcome of an investigation into unfair subsidies paid to Chinese EV manufacturers and the negative impacts of these on their European counterparts. As such, imports of EVs made by BYD will now face duties of 17.4%, but for Geely and SAIC, these will rise to 20% and 38.1%, respectively.
China has responded to the EU tariffs by saying that it will protect its national interests. This indicates possible trade retaliation by China which would increase trade tensions and accelerate the risk of global fragmentation. In China, domestic economic indicators show signs of some improvement in manufacturing, services, and real estate sector but the growth remains fragile. For the latest indicators, sales of new automobiles grew by just 1.5% in May, down from 9.3% in April, headline inflation remained flat at just 0.3%, and core inflation inched down to 0.6%. Beyond this, Yuan-denominated loan outstanding rose by 9.3% YoY, the slowest growth in history. The still-weak domestic spending, low inflation, and slower credit growth all indicate the weak recovery of Chinese economy.
MPC may maintain the policy rate at 2.50% through 2024; political uncertainties weigh on consumer sentiment
The MPC has held the policy rate steady, citing that level is consistent with the economy converging to its potential. At its 12 June meeting, the Monetary Policy Committee (MPC) voted 6 to 1 to leave the policy rate unchanged at 2.50% on the view that growth will continue to be supported through 2024 by: (i) domestic demand that is stronger than anticipated in 1Q24; (ii) the ongoing rebound in the tourism sector; and (iii) the effects of increased disbursements of government budget from 2Q24 onwards. Nevertheless, structural issues and the declining competitiveness of Thai industry mean that growth in exports is sluggish. Core inflation remained close to the previous forecast. One MPC member (compared to two in the past two meetings) saw a 25-bp cut to bring the rate closer into line with the economy’s weakening growth potential.
Given recent economic developments and the BOT's stance, Krungsri Research expects the policy rate to remain unchanged this year as: (i) GDP growth is likely to improve from 2Q24, and inflation is expected to return to the target range in 4Q24. Furthermore, the BOT noted that downside risks are easing. (ii) The committee remains concerned about financial stability, i.e., the high level of household debt. The BOT is attempting to guide the economy's deleveraging cycle through the use of monetary policy. (iii) Despite growth remaining below potential, the BOT reaffirmed the view of no significant change on “the neutral rate” and “the majority of the Committee deems that the current policy interest rate is consistent with the economy converging to its potential.” and (iv) The need for a broad-based interest rate adjustment has diminished thanks to: (a) recent rate cuts by commercial banks and SFIs targeting vulnerable borrowers, which aligns with the MPC's intention to support specific groups; and (b) the Committee’s support for targeted measures that will help increase credit access for SMEs and assist ongoing debt deleveraging by households.
Private consumption is showing signs of slowing on a fall in consumer sentiment to a 7-month low. The Consumer Confidence Index fell for the 3rd month in May, sliding from 62.1 to 60.5, its weakest since November 2023. Sentiment is being undercut by: (i) a surge in political uncertainty following the decision by the Constitutional Court to accept a case filed by 40 senators against the prime minister; (ii) the weakness of the recovery and the slowness of domestic growth; (iii) rising retail fuel prices; and (iv) the possible impacts of prolonged conflicts in the Middle East on the Thai and global economies.
Weakening consumer sentiment indicates that 1Q24’s strong growth in private consumption (+6.9% YoY) will tend to soften through the rest of 2024, although expenditure will continue to be supported by: (i) the ongoing strength of the tourism sector, helped further by government efforts to stimulate domestic tourism, especially in second-tier destinations; (ii) measures that provide assistance with the cost of living, in particular help with electricity bills for low-income families; (iii) the recent cuts in lending rates for vulnerable borrowers; and (iv) the mid-year ending of the El Niño and the positive impacts of this on agricultural incomes. However, going forward, structural problems related to high levels of household debt will continue to drag on consumption.
