Executive Summary: Marco headwinds persisting

Be prepared for (more) U.S. rate hikes

1Q22 was marked by heightened market volatility due to the military tensions between Ukraine and Russia and expectations of a faster pace in U.S. policy normalization on inflation overshoots. The Fed’s March dot plot, which shows the median policy rate projection, indicated a more aggressive rate hike path for 2022 before reaching a peak rate of 2.5-2.8% in late 2023. A sharp rate hike could put pressure on U.S. growth, also fueled by lingering Covid cases, supply chain disruption, and demand hit by high commodity prices. We believe the Fed will likely maintain a hawkish tone with the key goal of curbing inflation. The 10-year United States Treasury (“UST”) quickly approached c3% (+147bp YTD). Some consolidation cannot be ruled out, depending on upcoming inflation data and if the narrative of slower growth gradually becomes dominant. With quantitative tightening underway and the next FOMC meeting in May and June, market volatility will unlikely abate. Fed fund futures currently imply up to 250bp higher rates by the end of 2022.

Downward shift in China‘s GDP growth prompts more timely policy easing

In March, the National People’s Congress meeting set a GDP growth target of around 5.5% for 2022 (8.1% actual for 2021), with front-loaded infrastructure spending, higher tax cuts, monetary, and property easing. More monetary easing, which may include policy rate cuts or RRR cuts, should occur in ensuring abundant liquidity and supporting credit growth. We think more aggressive policy easing is still much needed as Covid outbreaks pose renewed downside risks to growth. In addition, higher oil prices, geopolitical conflicts, and easing global demand could narrow China’s trade surplus contribution to GDP. Overall, while China’s growth is expected to slow sequentially in 1H22 on covid-induced lockdowns, we expect it to bounce back in 2H22 on consumption rebound and some recovery in property sales. We believe the property sector to stabilize in the coming quarters, given signs of coordinated policy relaxation and bottoming out of credit contraction.

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