Nomura's Ticehurst on APAC Central Bank Policies

Andrew, I got to start with these Fed minutes, which really showed a very different sort of view from maybe what Jay Powell just said a few few weeks ago after that Fed meeting about, you know, they're ruling out of the possibility of rate hikes. But now you're hearing various FOMC members even willing to tighten policy more. So what? What is that? Does that change at all the equation for where how restrictive policy is going to be for the remainder of the year? Yeah, Very interesting those minutes, weren't they? Now, to be honest, I actually thought they were a little bit dated and might not be very interesting, but in the event they have captured attention with some of those hawkish comments there. Yeah. So a little bit surprising. What did come through for me from the minutes in particular was just some uncertainty from the central bank about how tight policy really was and you know, some thoughts about where the neutral rate really is. But definitely within those minutes and the prior day from Governor Waller, some more hawkish thoughts certainly coming through relative to the messaging that we've had from Fed Chair Powell. And as you've noted, that's given the US dollar, which was looking a little bit shaky there, has given it a bit of a boost back. OK. Now, should we actually, maybe it's a different question, should we actually consider the possibility of more rate hikes from the Fed or at least one look, look, we think no, it seems you know, whatever your degree of uncertainty about the level of neutral cash rate with with the five handle on the Fed funds rate, I think that the policy rate is clearly in restrictive territory. The economy, the macro data has been a little bit underwhelming lately. Q1 GDP was soft. We've got the economy running at a below trend pace over the next couple of quarters. So I think policies in restrictive territory, it's always a bit difficult for the Fed. I think of course, because a lot of the impact of policy changes come through more at the longer end, the longer end of the curve in credit spreads and equity markets. So, you know, sentiment there has been pretty bullish and I think that's perhaps adding to their sense that financial conditions are not perhaps as tight as they thought. But I, I think we're still on the tighter side of neutral clearly and with the macro data running a bit softer and our view that inflation is going to continue somewhat bumpy, but it's still a path of declining gradual trend. We think the Fed's certainly done enough at Nomura. We've got two Fed rate cuts pencilled in this year, the first of those coming in September and then another one in December. And then we've got quarterly cuts throughout 2025 as well. OK. So if, if, if we can't see any cuts until September for the Fed, Andrew, what does this mean for the rest of the world? I mean, you're talking about the RB, is that even considering even a hike in this last meeting? Are we likely to see an easing cycle in Asia? Yeah, Look, it's very interesting. We think so. The macro story across Asia is divided. Some countries, you know, such as India and Taiwan, doing pretty well, other regions doing less. So the central banks also I think, have a different, different beaters or different degrees of sensitivity to the Fed. We had Bank Indonesia out yesterday, of course, keeping their policy rate unchanged. That's certainly a central bank which is watching its local currency and it's going to be influenced by the US dollar and the Fed. But I would say that amongst DM, you know, western central banks, there's a few more degrees of freedom for the likes of RB and Z and RBA for that matter. And even the euro. I think it's more a domestic story. And they can, we think, disengage a little bit from the Fed cycle. Do you buy the RB and Z narrative that they could hike rates, that they will maybe wait at worst wait until late next year? Yeah, great question. Look, to be honest, I don't entirely buy that narrative. The RBARBNZ, sorry, they practice inflation targeting and they generate a profile with their cash rate, which gets them to an inflation target in the time frame that they can live with. Look, what I would say is the RBNZ is certainly at the hawkish end of the spectrum when it comes to central banks. They have a singular focus on inflation and they've demonstrated a great tolerance for pain on the macro side if that's what it's going to take in order to get inflation to target. So you know, they've rattled the Sabre a little bit on us yesterday. But I, I, I would say that another hike coming from a cash rate of 5.5. It is really quite unlikely. And what the RBNZ like the Fed is flagging some uncertainty about the level of neutral rates and the level of potential growth policy in New Zealand works at the short end of the curve. Most mortgages are two years or less and and with a cash rate at 5:50 and thoughts that neutral somewhere around 275. I don't think there's any debate whatsoever policies tied in New Zealand. Yeah, Andrew, just a question on that too. I mean it was just recently where we were talking about the RB and Z potentially cut. I mean, the economy is effectively in a recession on the growth respective. And I mean, do we do we understand this relationship any better between growth and inflation really? Yeah, Look, it's very fair. I think what we're seeing is inflation is declining. It's certainly well down from its peak, but the latest rate of four 4% year over year is still too high for a central bank targeting between 1:00 and 3:00. They've also, like a bunch of other central banks, of course, seen high service sector inflation and that's making them a little bit uncomfortable too. So, you know, we think the path of inflation is lower and the Ibn Z on their own admission is expecting that inflation is going to fall to the top of their target band by as soon as the end of the year. Now, given the policy lags, I think again, the the prospect for a rate hike is very, very modest in New Zealand. You know, growth this week, unemployment is rising, inflation is trending down. It's clearly just going to take a little bit of time to knock that last bit of the wind out of inflation and get the RBN Zed to a more comfortable place. Yeah. What about the RBA mean? They're not as hardcore focused on CPI in some ways. I mean, how do you contrast what we saw with the RBN Zed and and these RBA minutes that we got this week? We're we're also quite hawkish too. Yeah, look, absolutely such an interesting contrast between the RBA and the RBNZ. You're exactly right. Of course. The RBA in contrast, is pursuing a more balanced mandate. It doesn't want to destroy the certainly doesn't want to destroy the labor market and is trying to guide the unemployment rate back to kind of neutral levels. And you know, it wants to achieve its inflation target without giving up those hard won gains on the labor market front. Yeah, the RBA, of course, they too discussed the prospect for a higher cash rate. I guess that should come as no surprise given that they had a nasty surprise with Q1 CPI. But you know, I would say again, they're of the view that policy is already restrictive and the upside inflation surprising Q1 follows some downward surprises a bit a bit further back. And I think the message from the RBA in conclusion was actually really interesting. They said, look, in this uncertain environment, one thing we do know is that policy is restrictive. And they said, look, let's not try and fine tune things from here. So the message from me, from the RBA is that they're certainly going to sit back over the next couple of months. The prospect for a move up or down over the next 2-3 months at least is very, very small. But yeah, very, very different philosophy and a very different approach. Speaking of sitting back, do you think we could apply the same to the Bank of Korea? The press briefing begins in a couple of minutes. They've, you know, the economy's doing well. The exports are OK. The they, they, they see spending coming back. I think correction is the word that they used. Can they sit back and not even cut for the rest of this year? What do you think, Andrew? Yeah, we've got, we've got them certainly on hold today at 3.5. I think that's an easy one. We do have a rate cut penciled in for Korea later in the year, perhaps around October. You're exactly right. Of course. Some of the activity data for consumption and exports have been really quite strong and better than expected. Their latest Q1 GDP report was good too, and unemployment's holding at low levels around 2.8 there. We do expect the Bank of Korea to upgrade its GDP growth forecasts for 2024 today, but we're not expecting any movement on their inflation forecasts. And I think with an inflation profile, they're, you know, still still trending in, in, in a nice direction. I, I think the stage is still set for a Bank of Korea easing later in the year. It, it, it's not a no brainer, of course, but it's our central case at this point. Their currency has certainly has been hit by this stronger dollar story, Andrew. I mean, if you look at the, you know, the Asia Central base that you cover, are we likely to see more intervention to to try to support their currencies? Do they have enough reserves to really defend it? Yeah. Look, that's that's such an interesting one, isn't it? I know, again, you know, some countries have greater sensitivity to this. Indonesia's certainly one that we've been watching very, very closely. Philippines too, do they have enough FX reserves? Look, I think the story is a is a little bit mixed across the different central banks. Some are a bit stronger than others. But look, our central case still is that the US dollar is going to be trending lower overcoming months. A lot of investors are still long the US dollar and US growth momentum is has become a little bit underwhelming below, below trend. So yeah, so it could be a challenge for a few of them. But you know, with a view that the US dollar is gonna trend a little bit lower, I suspect that most of them are not going to be put to put to that test.