US

Labour market getting tighter

The hiring pace in February was the slowest since September 2017. The total number of jobs added was 20K with the unemployment rate at 3.8% and labour force participation rate at 63.2%. However, wages grew stongly by 3.4% y/y. A sharp drop like this could mean that the labour market is getting very tight and it is becoming tougher to fill vacancies, impying that it is hard to draw people back into the labour market.

Meanwhile, with the fiscal stimulus effects expected to fade later this year, the downside to the economic growth is much higher. We project the 2019 GDP growth at 2.3% with the core PCE inflation expected to be below the 2% target at around 1.8%–1.9%. On that note, we believe the current US Fed policy rate of 2.25%– 2.50% is more likely to stay. Room for a rate hike in our view is low at less than 10%. Instead, we are looking at more of a rate cut which could come in as early as 4Q2019 or 1Q2020.

• The hiring pace in February was the slowest since September 2017. The total number of jobs added was 20K from 311K in January (consensus: 180K). Meanwhile, the unemployment rate fell to 3.8% in February from 4.0% in January with the labour force participation rate at 63.2% for the second consecutive month. However, wages grew stongly. It rose 3.4% y/y in February from 3.1% y/y in January, the best reading in nearly 10 years.

• Generally, the economy does not downshift from 300K to 20K. A sharp drop like this could mean that the labour market is getting very tight and it is becoming tougher to fill vacancies, impying that it is hard to draw people back into the labour market.

• Meanwhile, with the fiscal stimulus effects expected to fade later this year, the downside to the economic growth is much higher. We project the 2019 GDP growth at 2.3% with the core PCE inflation expected to be below the 2% target at around 1.8%–1.9%. On that note, we believe the current US Fed policy rate of 2.25%–2.50% is more likely to stay. Room for a rate hike in our view is low at less than 10%. Instead, we are looking at more of a rate cut which could come in as early as 4Q2019 or 1Q2020.

China

Downward risk on economy

Factory gate inflation (producer price) rose 0.1% y/y while consumer headline inflation slowed to 1.5% y/y in the month of February. Meanwhile, USD-denominated exports plunged 20.7% y/y in February while USDdenominated imports fell 5.2% y/y, brinigning the trade balance to a weak US$4.12bil.

We would like to express caution on the data. It is being distorted by the week-long Chinese New Year public holidays, which started in early February this year. In 2018, Chinese New Year holidays started in mid-February. Still, the February’s trade data was “downbeat” as it provides further evidence that global demand is cooling and remains consistent with subdued domestic demand.

Underpinned by a slower global outlook and weak inflation, we foresee the economy growing around 6.2% in 2019. Room for the central bank to further relax the reserve required ratio remains high in the cards. More so with the economy slanting towards fiscal stimulus measures to sustain growth at a time when exports are expected to soften. Risk of shadow banking adding pressure towards a slower growth remains.

• Factory gate inflation (producer price) rose 0.1% y/y for the second consecutive month in February, marking a 28-month low. The weak growth was due to the decline in the prices of raw material prices, down to -1.5% y/y from -1.6% y/y in January. Meanwhile, consumer headline inflation slowed to 1.5% y/y from 1.7% y/y in January, the lowest since January 2018. It was dragged by weak food prices, up 0.7% y/y from 1.9% y/y in January.

• Meanwhile, USD-denominated exports plunged 20.7% y/y in February from +9.1% y/y in January while USDdenominated imports fell 5.2% y/y in February from -1.5% y/y in January. Hence, February’s trade balance weakened to US$4.12bil versus January’s trade balance of US$39.16bil.

• We would like to express caution on the data. It is being distorted by the week-long Chinese New Year public holidays, which started in early February this year. In 2018, Chinese New Year holidays started in mid-February. Still, the February’s trade data was “downbeat” as it provides further evidence that global demand is cooling and remains consistent with subdued domestic demand.

• Underpinned by a slower global outlook and weak inflation, we foresee the economy growing around 6.2% in 2019. Room for the central to further relax the reserve required ratio remains high in the cards. More so with the economy slanting towards fiscal stimulus measures to sustain growth at a time when exports are expected to soften. Risk of shadow banking adding pressure towards a slower growth remains.

Source: AmInvest Research - 11 Mar 2019