US Fed preparing for further rate cuts; Cooling inflation allowing BOJ to raise rates slowly; China ramps up stimulus amid ongoing slowdown
US
US soft-landing scenario and high core inflation are supporting the Fed in gradually cutting rates. In 2Q24, US GDP grew 3.0% QoQ annualized, up from 1.4% in 1Q24, driven by consumer spending and private investment. In September, the services PMI expanded further at 55.4, while manufacturing PMI contracted the most in 15 months at 47. Additionally, in August, new home sales grew 9.8% YoY, and mortgage applications rose by 2%, in line with a drop in the 30-year mortgage rate to a two-year low of 6.1%.
The weaker labor markets, contracting manufacturing, and lower consumer confidence in September have increased the chances of 50 bps rate cut by the Fed in the November meeting. However, concerns about a recession have eased due to (i) lower mortgage rates improving the housing market, reflected in the recovery of new home sales and mortgage applications, (ii) initial jobless claims falling to a 4-month low, with consumption and services still expanding, and (iii) solid US economic growth in Q2. Hence, Krungsri Research expects the Fed to cut interest rates further at its remaining two meetings this year, with cuts of 25 bps each, bringing rates down to 4.25-4.50% by year-end.
Japan
Japan's slowing inflation and modest economic growth, combined with policy direction of incoming government, support views of gradual rate hikes. Shigeru Ishiba is expected to be Japan's new prime minister after winning the LDP leadership election and will take office following a parliamentary vote on October 1. September's Tokyo inflation slowed to 2% YoY from 2.4% the previous month, while Tokyo core inflation eased to 2.2% from 2.6%, reducing pressure on the BOJ to accelerate rate hikes.
Ishiba's election victory strengthened the yen by over 1% against USD, as markets expect his government to support the BOJ in normalizing monetary policy with gradual rate hikes. However, weak manufacturing and exports may cause economic recovery to remain fragile with low growth. Furthermore, the reintroduction of energy price subsidies from September is expected to slow inflation further. Krungsri Research expects the BOJ will raise rates by another 25 bps by the end of 2024, aligning with the BOJ’s data-dependent approach, which will be based on economic and inflation developments.
China
China swiftly rolled out a broad set of measures to counter the economic slowdown. Key steps announced over the past week include: (i) cutting policy rates by 10-30bps and lowering the reserve requirement ratio; (ii) reducing the minimum down payment for second-home purchases from 25% to 15%; (iii) cutting mortgage rates by 50bps for current borrowers; (iv) providing subsidies to vulnerable groups by 1 October; (v) offering social security benefits to graduates who cannot find full-time jobs within two years; and (vi) restricting new home construction to reduce excess supply. Also, the government is considering plans to: (i) issue bonds worth USD142 bn to boost consumption and additional USD142 bn to help resolve local government debt; and (ii) inject USD142 bn into large state-owned banks, the first such move since the 2008 crisis.
The latest measures are the largest since China reopened the country. These should partially ease the economic slowdown in the near term while reducing the risk of missing its growth target of around 5% this year. However, policy effectiveness may be weakened by: (i) weak consumer and business confidence which could lead to lower-than-expected consumption and investment; (ii) delays in policy implementation, with only 4% of total funds disbursed for buying of excess housing (data as of June); and (iii) structural issues such as local government debt and an aging population which will take time to resolve.
Growing exports to lift the economy in Q3; Manufacturing contraction dragging on private investment growth
August exports continued to grow, supporting the overall economy for Q3, but several factors may hinder Q4 exports. The Ministry of Commerce reported that August export value grew by 7.0% YoY to USD 26.2 bn, compared to 15.2% growth in July. Excluding gold, exports grew by 6.2%. Key export products that saw growth included computers & components (+74.7%), rubber (+64.8%), rice (+46.6%), air conditioners & parts (+15.2%), rubber products (+14.9%) and chemicals (+12.5%). Exports of automobiles, equipment, & parts turned to slight growth (+0.4%). On the other hand, exports of some categories contracted, such as integrated circuits
(-33.2%), sugar (-14.2%), and cassava products (-11.5%). Exports to key regions expanded, led by the US, the EU, China, ASEAN-5, and CLMV, while exports to Japan continued to decline. For the first 8 months of 2024, export value grew by 4.2% YoY, or 3.8% excluding gold.
August exports exceeded the monthly average value of USD24.4 bn during the first 7 months of the year, supported by the recovery in the global electronics cycle and the demand for agricultural and food products, driven by the growth of services in major markets. However, exports face challenges that could limit growth, and the outlook for Q4 could see slower expansion, with expected full-year export growth of around 2%, due to (i) clearer signs of economic slowdown in key trading partners like the US and China (Thailand’s exports are highly correlated with the US and Chinese imports with correlation of 0.81 and 0.66, respectively); (ii) domestic flooding that may impact some certain agricultural outputs; and (iii) the appreciation of Thai baht, which could affect exporters' income. Additionally, other risk factors include (i) structural issues or the competitiveness of Thailand’s manufacturing sectors, (ii) prolonged geopolitical conflicts, and (iii) intensifying trade wars and oversupply of products from China flooding global and Thai markets, which could hurt Thailand’s manufacturing and export sectors who face relatively high production costs.
Weak industrial production may reflect a slow recovery in private-sector investment. The Office of Industrial Economics (OIE) reported that the Manufacturing Production Index (MPI) shrank again by 1.9% YoY in August, compared to a 1.6% expansion in July, due to output declines in major industries such as automobiles (-18.0%), electronics (-11.8%), and construction materials (-13.5%). Meanwhile, the capacity utilization rate fell to 58.3% in August from 58.8% in July. However, some certain sectors saw growth, including food (+4.8%) and chemicals (+3.1%). Over the first 8 months of 2024, the MPI contracted by 1.6% YoY, with an average capacity utilization rate of 59.0%. Recently, the OIE revised down its full-year MPI forecast to a contraction of -1.0% to 0%, compared to the previous projection of 0-1% growth.
Manufacturing production turned contraction again in August, led by the automotive sector. This was mainly due to a shrinking domestic market, especially for pickup trucks and small passenger vehicles, combined with slow economic recovery, high household debt, and fewer loan approvals. In the electronics sector, the drop was primarily driven by reduced production of integrated circuits (IC). Meanwhile, the construction materials saw output decline due to the slowdown in the real estate market, delays in government construction projects, and flooding in some areas. Weak industrial production and capacity utilization of below 60% may suggest a slow recovery in private investment, which contracted by 6.8% in Q2. For 2024, private investment growth is expected at only 0.2%, down from 3.2% in 2023.
