Executive Summary

US: More patience for a policy pivot

Softer prints in US inflation and the Fed’s dovish tone in 4Q23 have buoyed expectations for a pivot to materialize in 2024. We have likely passed the peak monetary tightening cycle we saw in 2022 and 2023, when the Fed raised rates by 425bps and 100bps, respectively, and paused in the September 2023 meeting, given the moderating inflation trend. However, the inflation print in January 2024 surprised on the upside, making the last mile of disinflation a difficult one. Overall, we believe the Fed will ensure inflation is durable enough to reach its 2% target and stay patient on the rate cut path.

The changing inflation landscape and the Fed’s cautious optimism regarding the US economic strength have shifted market expectations of the rate cut magnitude in 2024 – from initial expectations at the start of 2024 of seven rate cuts for the year to just three-five times. Some risks emerge for a June cut if inflation remains surprisingly persistent. This also suggests the volatility of the US Treasury (UST) yield could rise.

The US’s real GDP finished strong at 3.1% YoY in 4Q23 (+2.9% YoY in 3Q23), driven by upside in trade, business investment, and consumption. Our base case is a softer economic trend post restrictive monetary policy in the past two years. The lower fiscal stimulus, higher borrowing costs, and a sequential slowdown in consumption could present some headwinds for growth in 2024.

China: A reactive easing stance to cope with slower growth  

China’s real GDP in 4Q23 slowed sequentially from 3Q23 but expanded at 5.2% in 4Q23 YoY (+4.9% YoY in 3Q23) due to a low base effect. Infrastructure fixed-asset investment (FAI), exports, and retail sales all accelerated on a YoY basis. However, property sales remained sluggish. The deflationary trend intensified, with CPI falling by 0.8% YoY in January 2024.

China has accelerated easing efforts, though mostly modest in scale and piecemeal. We see limited monetary options, and the ongoing emphasis on accommodative measures would not deviate much. With respect to the property sector, new policies introduced in January 2024 focused more on the property financing side, including “whitelist” projects eligible for funding support and investment property (IP) operating loans. We see these marginally positive. We believe property sales remain instrumental in the sector’s turnaround, which requires an improvement in income growth and job security expectations. While the sector may create a lower drag compared to previous years, we also need an overall reflationary policy, potentially with more fiscal stimulus.

We believe challenges remain for the government to address the efficacy of fiscal expansion, demographic issues, and weak demand in the medium term. The National People’s Congress (NPC) meeting next month shall give some further clues on growth drivers whereby focusing on high-quality growth should remain a top government priority. Some of the key assumptions being factored in include the setting of the fiscal deficit at 3-4% and government bond issuance to be at a similar scale as last year, more pledged supplementary lending (PSL) to be provided by the PBOC to banks for the infrastructure and property sector, and easier monetary policies like RRR and rate cuts.

Asia: Disinflation progress supports an easing path

The post-Covid growth recovery in Asia and stable macro backdrop support the credit quality of Asian bond issuers. The broad assumption that a US policy pivot does not coincide with a major growth slowdown would limit the downside risk on growth for most Asian countries. The excessive monetary tightening has not led to widespread asset quality issues for Asian banks, which have maintained steady non-performing loans (NPLs). We expect some Asian countries to start rate cuts in 2024 on a more benign inflation trend, as seen in 4Q23. Lower borrowing costs should have a positive impact on credit appetite to fund expansion plans. This, coupled with resilient domestic demand, should underscore the growth trend. Geopolitical tensions leading to a sharp rise in oil prices could expose some risks to Asia, which is largely a net commodity importer, though we believe this is manageable.

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