Executive Summary 

US: Moderating inflation paving a rate cut path, but the last mile remains bumpy

The upside surprise on inflation and job market prints in 2024 anchored the trend of higher US treasury (UST) yields, with the 10-year UST climbing to this year’s high at 4.7% in late-April before settling at about 4.4%. Market expectations for a pivot to materialize this year remain unchanged, though the timeline is being pushed back to 4Q24. The last mile of disinflation could be bumpy, given ongoing resilience in both US growth and its labor market. Markets now price in for a 39bp rate cut in 2024 versus 28bps in late-April.

Ultimately, we think the Fed’s view is predicated on inflation being durable enough to reach the 2% target, and obstacles are unfolding that may imply a more gradual rate cut path, not an aggressive one. For instance, the US’ fiscal position and the geopolitical tension-led energy inflation are developing events.

An additional rate hike would have negative implications on risky assets. We believe the chance of that scenario is low ahead of the US election, together with a moderating inflation trend and 2.1% real rates, which means the bar back to monetary tightening is high. Given the moderating inflation trend, we envisage one or two rate cuts in 2H24.

1Q24 GDP delivered a mixed picture, with the economy expanding slower on a quarter-on-quarter trend, whereas inflation data topped consensus estimates. We stick with our base case of a soft-landing post-restrictive monetary policy in the past two years. A slowdown in consumption could see a modest deceleration in growth for 2H24.

China: Push for inventory clearance to revive property sector but requires patience on effectiveness

The easing measures on the property sector announced in May have modestly revived sentiment. Major measures include the lowering of down payment and financial aid from the People’s Bank of China (PBOC) to support local governments in purchasing unsold but completed projects of up to RMB500 billion (mainly funded by the PBOC’s re-lending facility of RMB300 billion).

We acknowledge the size of financial support may not fully and immediately cure the inventory problem, but the package highlights regulatory efforts and a sense of urgency in accelerating a destocking cycle to tame systemic risks. We believe the policy is heading in the right direction with the shift of emphasis towards clearance of inventory, which we think is a more effective way to stabilize housing prices and household confidence, in addition to timely delivery of properties.

However, this is expected to be a long process, given uncertainties associated with incentives and the speed with which local government and banks execute tasks. In our view, the sector may create a lower drag than in previous years but we also need an overall reflationary policy, potentially with more fiscal stimulus.

China’s real GDP expanded 5.3% in 1Q24 year-on-year due to a low base effect. We expect a similar year-on-year trend in sequential quarters under the baseline assumption of the property sector being stabilized. Exports and manufacturing capex to upgrade supply chains remain to be the key growth drivers.

Asia: India’s surprising election results should have a manageable impact on credits

The export recovery in Asia has continued, with markets more closely aligned with the global technology supply chain, such as South Korea and Taiwan, benefiting the most. The overall stable macro backdrop supports the credit quality for Asian bond issuers. The broad assumption that a US policy pivot does not coincide with a hard landing would cap 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 nonperforming loans (NPLs). That said, Asian countries should see a shallow rate cut cycle, and most would look upon Fed’s rates decision. The developing trend of lower funding costs should have a positive impact on credit appetite to fund expansion plans. This, coupled with resilient domestic demand, should underscore the region’s growth trend.

Meanwhile, India’s election results came with a surprise, with the incumbent ruling party, the Bharatiya Janta Party (BJP), losing its parliamentary majority. While this implies greater reform challenges in a coalition government, we do not see the election results completely derail India’s policy continuity and growth path. Hence, we expect a limited impact on Indian bond issuers.

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