• Weaker-than-expected labour market data pressures Fed to cut rates faster. The U.S. Federal Reserve (Fed) left the federal funds rate (FFR) unchanged at a 23-year high for the eighth consecutive meeting in July and laid the groundwork for a rate cut in September. However, this decision was quickly followed by new data showing a deterioration in the U.S. labour market, with the number of Americans filing for unemployment benefits rising to an 11-month high. This has heightened concerns about a sharp slowdown in the U.S. economy, potentially prompting the Fed to consider more aggressive rate cuts. At the time of writing, markets have priced in a greater than 70% chance of a 50bp rate cut in September, up from around 12% a week ago. Additionally, the markets expect two 50bp cuts by the end of the year.

• ECB holds its interest rates steady, pausing after delivering a 25bp cut at June’s meeting. July’s rate pause decision echoed recent remarks from several European Central Bank (ECB) policymakers, including President Christine Lagarde, indicating the need to wait for further evidence of inflation firmly returning to the 2.0% target before making another move. However, the ECB left the door open for another rate reduction in September as it downgraded its view of the Eurozone’s economic prospects and predicted that inflation would continue to trend downward. While the ECB refrained from providing stronger guidance, markets remain optimistic about ECB rate cuts, pricing in almost two reductions for the rest of the year.

• BoE cuts policy rate for the first time in more than four years. The rate cut decision, reached in a narrow 5-4 vote as policymakers split over whether inflation was sufficiently tamed, reduced the policy rate from a 16-year high of 5.25% to 5.00%. However, Bank of England (BoE) Governor Andrew Bailey refrained from indicating the timing of the next rate cut, stating that the BoE was not committing to a series of rapid reductions. The BoE remains concerned about the upside risk to inflation, projecting U.K. headline inflation to rise to 2.75% in Q4 2024 as the favourable effect of energy prices dissipates. Markets are still betting on a half chance of another rate cut later in the year, anticipating that stubbornly high services inflation will edge lower.

• China’s slower-than-expected GDP growth in 2Q2024 has intensified calls for more effective stimulus measures. GDP growth decelerated to 4.7% in 2Q2024 (1Q2024: 5.3%), raising concerns about China’s ability to meet its full-year growth target of 5.0%. Domestic demand has been weakened by a prolonged property downturn, resulting in the lowest retail sales growth in 18 months in June. Meanwhile, China's exports grew at their fastest rate in 15 months in June, increasing by 8.6% (May: 7.6%), likely due to front-loading orders in anticipation of escalating trade tensions, particularly with the U.S.. In response to growth risks, the People’s Bank of China (PBoC) announced a 10bp cut to the seven-day reverse repo rate, the one-year Loan Prime Rate (LPR), and the five-year LPR, reinforcing its commitment to supporting the economy. This move comes after China’s Third Plenum left investors disappointed due to a lack of details on reforms.

• BoJ pushes forward monetary policy normalisation. At its July policy meeting, the BoJ delivered a larger-than-expected rate hike, raising its short-term interest rate to around 0.25% from the range of 0% to 0.1%. The decision for this second rate hike of the year was unanimous, reflecting policymakers’ growing concerns about the weakened Japanese yen which could adversely impact the economy. BoJ Governor Kazuo Ueda, in his post-meeting remarks, said that the interest rate remains very low even after the hike and indicated that the bank would consider further rate hikes if the economy progresses as projected. An expected narrowing interest rate differential between Japan and the U.S. led investors to realign their portfolios, sparking a massive sell-off across global stocks. Additionally, the BoJ unveiled plan to halve its government bond purchases to 3.0 trillion yen by early 2026.

• Malaysia’s 2Q2024 GDP growth set to be the fastest in six quarters. According to the Department of Statistics Malaysia (DOSM), the economy is estimated to have expanded by 5.8% in 2Q2024, accelerating from 4.2% in 1Q2024, thus bringing the overall growth in 1H2024 to 5.0%. All sectors except for mining registered faster growth. Of note, construction sector continued to record a double-digit growth at 17.2% (1Q2024: 11.9%), suggesting increased investments alongside development projects. Services sector, which constitutes the largest portion of GDP, grew by 5.6% (1Q2024: 4.7%) amid festive holiday demand, vibrant tourism activities, and still healthy labour market conditions. Meanwhile, Malaysia’s June inflation remained steady at 2.0%, well below market expectations for an increase to 2.2% despite diesel subsidy rationalisation.

Source: BIMB Securities Research - 6 Aug 2024