Dear all,
The market was relatively calm in March. As we anticipated, the market reacted positively to the Fed’s signals affirming solid economic growth while maintaining the plan to cut rates this year, with the markets we have been bullish on, including MSCI USA (+3.2%), Taiwan (+6.8%), Germany (+3.8%), France (+3.1%), and Japan (2.5%), all reaching new highs.
In the currency market, the US Dollar Index (DXY) rose by 0.43%, the euro remained largely unchanged, the Japanese yen declined by 0.87%, and the Swiss franc fell sharply by 2.0% following Swiss central bank’s surprise rate cut. In commodities, gold and copper prices both rose, while other commodities delivered mixed performance.
In this month’s article, I’ll start with our house view on several economies, and at the end of the article, I’d like to share our assessment on the macro scenarios that may play out, and the corresponding market trends and investment logic.
US Economy: Healthy Liquidity and Resilient Fundamentals, the Perfect Combination
Key data prints in March presented few concerns. The February nonfarm payroll reading maintained a healthy growth of 275,000 jobs, and retail sales showed a modest increase of 1.5% year-on-year. Though flexible-price inflation has stopped falling as much, sticky-price CPI continues to play a key role in curbing core inflation.
Most importantly, the end-of-March FOMC meeting saw the Fed maintaining their plan for three rate cuts this year while raising economic outlook for 2024, 2025 and 2026 to 2% or above. PCE projections also delivered, remaining largely unchanged. These signs point to the scenario of “no landing + three rate cuts,” which is even better than the previously deemed best-case scenario of “soft landing + three rate cuts.”
As for the Fed’s actual moves ahead, we’re not ruling out the possibility of the dot plot being adjusted to just two rate cuts in June. That said, anticipating the Fed will announce to slow down balance sheet reduction in May or June, and that broader economic fundamentals will remain robust, we still believe that as long as there’s no talk of rate hikes, monetary policy developments would have limited impact on the market.
Other Economies: Taiwan and Japan Robust, Europe and China Resilient But Still Consolidating
Regarding other economies, some of the most noteworthy events in March were the unexpected rate hikes in Taiwan and Japan, though our assessment is that there would be little impact on the market. Japan’s rate hike primarily stemmed from the need for interest rate normalization, rather than a signal of continuous tightening. As for the unexpected rate hike in Taiwan, the central bank cited the impending electricity price hike as the reason. But according to last year's experience, the impact of electricity price hikes on inflation is one-off. Also, currently the Taiwanese economy and housing prices are too strong. On top of that, the fact that real interest rates are still negative does give the central bank the room to raise rates, which should not hinder the uptrend of the Taiwanese stock market or economy and will create room for TWD to appreciate.
On the other hand, Europe and China have remained in a phase of weak recovery, but the worst is behind us! Besides, their softer recovery actually contributes to global price stability.
For Europe, the highlight of March is the rapid easing of inflation, with HICP inflation falling from last year’s high point of 10.6% to 2.6%, now lower than inflation rates in the US, setting the stage for rate cuts in the first half of the year in the Eurozone. As a matter of fact, the Swiss National Bank has fired the first shot among the G10 countries. Subsequent easing by other Eurozone countries is expected to further alleviate pressure on economic performance.
In China, the real estate market is still not doing well, but it seems that the sector is no longer dragging down the broader economy and domestic consumption. China’s CPI rose 0.7% year-on-year in March, returning to positive growth from the previous month’s -0.8%. In terms of mid-month data, industrial value added (7%),
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