Executive Summary  

US: A front-loaded pace of monetary easing
The US Fed’s larger-than-expected 50bp rate cut in September was a surprise, reflecting the central bank’s confidence that its long-term inflation target of 2% can be maintained, and the cooling job market showed no alarm. The Fed guided two more 25bp cuts by end-2024 and another four more 25bp cuts in 2025. US futures market prices for a lower Fed Fund rate than the 3.4% envisioned by Fed by end-2025. Despite the 50bp move, the Fed appears less likely to embark on an aggressive easing path unless the job market gets weaker, with the median dot plot estimate on the long-run Fed Fund rate largely unchanged at around 2.9%.

The market will shift its attention to the US election and fiscal development in the coming months, and volatility will likely rise. A Trump victory would likely lead to expectations of aggressive tariff actions and an inflationary environment. Additionally, a Republican sweep could increase the likelihood of fiscal deficit. Both scenarios could mean a return to a slower rate cut path.
The 2Q24 GDP growth of 3.0% (QoQ) and 3.1% (YoY), driven by consumer spending, exceeded expectations after a mixed 1Q24. Our base case assumption of a slowdown in consumption due to the massive monetary tightening in the past year remains unchanged. This means a deceleration in growth for 2H24, given also a high base in 2H23.

China: Sentiment lift on more stimulus to come
Recently, China introduced another suite of measures to stimulate the property and equity markets. These include cuts on the reserve requirement ratio (RRR) and policy rates, further relaxation on housing policies, and liquidity support for stocks. In a statement, the government pledged to stop the property market’s decline and stabilize it, reflecting that it recognizes the strong urge to resolve inventory issues and revive consumer sentiment. However, the impact on growth and the path to reflation will hinge on the speed of execution.

According to media reports, the government may issue ultra-long special sovereign bonds of about RMB2-3 trillion in the coming weeks to boost economic growth further, ease local government stress, and drive consumption. We believe the broader measures may not imminently cure the weak consumption and housing inventory issues. The housing destocking cycle is also a long-drawn process that requires coherent and effective cooperation between local government and banks, as well as sizable financial support to normalize high inventories. So far, the progress on destocking has been slower than expected.

China’s real GDP expanded 0.7% (QoQ) and 4.7% (YoY) in 2Q24 – a miss due to the continued property downturn and sluggish consumption. We believe these factors will remain headwinds for growth in 2H24. Separately, a significant US tariff hike on Chinese exports will also be a drag on growth.

Asia: Maintaining resilient growth, cautious on tariff noises
While export expansion remains mild, GDP growth was resilient for most Asian economies in 2Q24. Notably, Indonesia’s GDP growth was stable at 5.1% YoY, thanks to increased investment and net exports, and India’s growth normalized to 6.7% YoY from 7.8% in the previous quarter amid slower government spending due to parliamentary elections. We expect these markets to exhibit solid growth for rest of year.

We believe a stable macro backdrop shall continue to support the credit quality of Asian bond issuers. Our assumption of a US soft landing should not derail the growth in Asia. Asian countries shall see some room to cut rates (e.g. Indonesia, India) as the US enters a broader easing cycle and benign domestic inflation. The trend of lower funding costs should positively impact credit appetite to fund expansion plans. Corporates shall also benefit from cheaper domestic funding access, which help reduce refinancing risk.

The growth of Asia ex-China countries is closely correlated with exports, and trade dependence on the US is on the rise. We take a cautious stance on those with higher trade-related exposure, including Korea and Taiwan, despite the tech sector’s increasing instrumental role globally. We are relatively more constructive on Indonesia and India, given their resilient growth and less exposure to trade risks.

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