2025-02-10 07:04

Key takeaways The yield curve has flattened by around 20bp since the US 10-year yield peaked in mid-January. However, some analysts continue to think the trend is towards a “structural steepening”. US earnings season approached half-way last week, with some of the S&P 500’s big technology names reporting figures for Q4 2024. After the recent ‘AI trade’ wobble, the outlook for tech profits has been under the microscope – particularly given the sector’s high valuations. India’s recent FY2025-2026 Union Budget endeavoured to strike a balance between boosting growth, maintaining capex spending, and sticking to a path of fiscal restraint. Chart of the week – Policy uncertainty and stock market valuations Quantitative measures of global policy uncertainty are increasing. Last week, like in the last few weeks, investors had to deal with another burst of episodic volatility in markets. Global stocks weakened, reflecting how policy uncertainty can be a challenge to profits and how it prompts more risk aversion. While, in government bonds, there was a “flattening” of the yield curve (see further details on page 2), as markets reflected the possibility of bumpier disinflation. Meanwhile, the US dollar remained a safe harbour, strengthening as policy uncertainty increased. But after being a serial winner in FX markets, investors are beginning to question whether “King dollar” can keep the crown? After all, the dollar is expensive, the Fed is still cutting rates in 2025, and US fiscal deficits are very wide. Investors need to consider the possibility that further dollar strength may be temporary. Another telling sign of risk aversion in markets was the rally in the gold price. Gold has been on a tear over the past 12 months. The recent rise in policy uncertainty has seen that trend continue. Overall, the latest bout of volatility – the third this year after the surge in bond yields and the AI trade wobble during January – reinforces that markets will face a volatile ride at times in 2025, albeit against a broadly constructive backdrop of no recession, further rate cuts and resilient profits. This is called “volatile Goldilocks”. Market Spotlight Hedging volatility With bouts of volatility proving to be a feature of markets this year, diversification strategies are front of mind for asset allocators. After a strong performance in 2024, one asset class that could be ideally placed to keep delivering in these conditions is hedge funds. Hedge funds have a track record of outperforming global balanced portfolios during spells of particularly high volatility. Moreover, when you combine them into well-diversified portfolios of different strategies, their own volatility profile compares well against traditional assets. In fact, with recent volatility notably affecting cryptocurrencies, hedge funds also offer potentially more resilience than non-traditional, crypto diversifiers. Crucially, hedge fund strategies can profit from volatility in a range of ways, including long and short positioning, and arbitrage opportunities. Against a backdrop of higher levels of uncertainty, they have new opportunities to feed off the associated volatility. For 2025, rising uncertainty and market volatility are likely to play to the strengths of hedge funds, providing a potential boost to returns, as well as a degree of downside protection. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 07 February 2025. Lens on… Curve appeal The yield curve has flattened by around 20bp since the US 10-year yield peaked in mid-January. However, some analysts continue to think the trend is towards a “structural steepening”. The prospect of further gradual Fed easing should put downward pressure on the two-year yield while further declines in the 10-year yield are likely to be limited by two key factors. First, US government debt is high and rising, and the situation is unlikely to change anytime soon. Second, a more fragmented geopolitical and international trade backdrop implies greater inflation volatility. The term premium on US Treasuries could, therefore, trend higher as investors require greater compensation for holding longer dated debt, leading to a gradual steepening of the curve. Moreover, should growth disappoint, and the Fed eases policy aggressively, the curve would steepen rapidly. Where this view could go wrong is if the Fed were forced to hike the funds rate. However, the bar for this to happen is quite high given Chair Powell views policy as “meaningfully restrictive” and the FOMC does not want labour markets to “cool off anymore”. Earnings broadening? US earnings season approached half-way last week, with some of the S&P 500’s big technology names reporting figures for Q4 2024. After the recent ‘AI trade’ wobble, the outlook for tech profits has been under the microscope – particularly given the sector’s high valuations. Some ‘Magnificent Seven’ stock prices have been punished on marginal profit misses, high capex spending, and disappointing forward guidance. In terms of year-on-year Q4 profit growth, Financials are leading the index, with Communications Services and Technology also beating expectations. Among the growth laggards have been Industrials, Energy, and Materials. While the profits growth outlook is solid for the US, there have been downward revisions to 2025 consensus expectations recently. By contrast, Europe and China, which both saw a deterioration in the profit growth outlook last year, have seen revisions pick-up for 2025. This is evidence of profit growth potentially broadening beyond the US to markets that are significantly cheaper. In Europe, weak sentiment has set a low bar for positive surprises. While in China, further policy stimulus this year could herald a performance pick-up. India’s growth plan India’s recent FY2025-2026 Union Budget endeavoured to strike a balance between boosting growth, maintaining capex spending, and sticking to a path of fiscal restraint. India experienced a cyclical slowdown last year, so a key budget pivot was an income tax cut to encourage consumer spending. Meanwhile, capex spending on road and rail is set to remain flat, with marginal growth in other sectors. And as for the fiscal deficit, the reduction target for FY25-26 is 4.4% versus 4.8% in FY24-25. In response, consumer stocks rallied, while some railway, industrial and capex-sensitive plays corrected. Indian stocks have weakened since their peak last September, and CY24 earnings expectations have fallen by 3%. With an easing in frothy valuations, the large-cap Nifty 50 index now trades at a forward price-to-earnings ratio of 19.3x, which is around its five-year average. However, major sectors (excluding financials) are still trading at a premium and could be vulnerable to any macro or profit disappointments amid elevated short-term expectations. Active stock selection remains crucial. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. Source: HSBC Asset Management. Macrobond, Bloomberg, Datastream. Data as at 7.30am UK time 07 February 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 07 February 2025. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Market review Rising global policy uncertainty cast a pall over risk markets last week. While the US dollar index consolidated, core government bonds rallied in response to some weaker-than-expected US macro prints, with eurozone bonds and UK Gilts slightly outperforming US Treasuries. The BoE lowered rates by 0.25%, with two members calling for a 0.50% reduction. In the stock markets, US equities reversed early losses last week, benefitting from lower US bond yields. The Euro Stoxx 50 index recorded stronger gains following a wave of upbeat earnings, while Japan’s Nikkei 225 ended lower amid investor caution over external uncertainties and a firmer yen against the US dollar. Other Asian stocks mostly performed well, with Hong Kong’s Hang Seng and mainland China’s Shanghai Composite posting catch-up rallies after the Lunar New Year holiday. In commodities, oil fell, whereas gold and copper both rose. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/policy-uncertainty-and-stock-market-valuations/

2025-02-05 21:05

Key takeaways Table of tactical views where a currency pair is referenced (e.g. USD/JPY):An up (⬆) / down (⬇) / sideways (➡) arrow indicates that the first currency quotedin the pair is expected by HSBC Global Research to appreciate/depreciate/track sideways against the second currency quoted over the coming weeks. For example, an up arrow against EUR/USD means that the EUR is expected to appreciate against the USD over the coming weeks. The arrows under the “current” represent our current views, while those under “previous” represent our views in the last month’s report. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-trends/fx-eyes-on-us-trade-policy-developments/

2025-02-05 21:04

Key takeaways India announced tax cuts to support consumption, held on to its capex thrust, and yet stuck to a fiscal consolidation path. On the budget math, expenditure assumptions can be met with the pruning of schemes... ... but tax revenues could disappoint mildly; overall fiscal impulse will likely be negative. The government walked the tightrope in their 1 February budget, balancing several conflicting objectives. It provided near-equal stimulus to both consumption (personal income tax cuts amount to INR1trn) and capex (budget outlays rise by INR1trn), while lowering the fiscal deficit (as promised, from 4.8% in FY25 to 4.4% of GDP for FY26). It also announced its intention to lower the centre’s debt to c50% of GDP by FY31. On the budget math, the personal tax revenue growth assumption (of 14.4% y-o-y) looks overoptimistic given those earning up to INR1.2m per year (INR0.7m earlier) will not be liable to pay income tax under the new regime. However, non-tax revenue assumptions look realistic. Central government capex is expected to grow in line with nominal GDP (at 10% y-o-y). But when scheme transfers to states and public sector enterprise (PSE) capex are added, overall capex is likely to grow faster at 16% y-o-y. Central to meeting the fiscal deficit target is cutting current expenditure. Here, a lower fertiliser subsidy bill and pruning other outlays is key. With fiscal consolidation, net market borrowing in FY26 is lower than a year ago. But because of a higher redemption bill, gross market borrowing is higher. However, we are not worried. The growth in borrowing is well under nominal GDP growth, and with the RBI having turned buyer, should be comfortably funded. Aside from the consumption stimulus and the capex thrust, import tariffs were lowered for key inputs, and several tariff rates eliminated, in a bid to help India plug into global supply chains as they get rejigged. The FDI limit in insurance was raised, and promises to lower the regulatory burden on industry were made. With consolidation, the fiscal impulse is likely to be negative. But inflation is falling, and we expect the RBI to cut rates and infuse domestic liquidity, picking up the growth baton. Adhering to fiscal consolidation The government announced the following fiscal deficit path - A fiscal deficit of 4.8% of GDP for FY25, lower than the budget estimate of 4.9% of GDP. A fiscal deficit target of 4.4% of GDP for FY26 (HSBC: 4.4% of GDP), marking 0.4% of GDP fiscal consolidation. Despite nominal GDP growth coming in lower than budgeted (9.7% y-o-y vs. 10.5%), the government expects to end FY25 with a lower-than-budgeted fiscal deficit. This has been made possible by lower than budgeted capital expenditure on account of election-led delays (INR10.2trn vs INR11.1trn budgeted). Despite pressures to support growth, the government stuck to its promise of lowering the fiscal deficit further in FY26, to below 4.5% of GDP. This, we believe, is a big positive for macro stability. Following the numbers released on 1 February, the general government fiscal deficit stands at 7.3% of GDP, lower than 7.6% a year ago, but higher than 5.9% in the pre-pandemic period (see exhibit 2). As such, some sense of a future consolidation path post-FY26 becomes important. Here, the government also announced its medium term fiscal consolidation path. In the years ahead, it plans to “keep the fiscal deficit each year such that Central Government debt remains on a declining path as a percentage of GDP”. It has set a new target of central government debt at 50% +/-1% of GDP by FY31, from 57.1% in FY25. Fiscal math: Spending numbers reasonable; revenues a tad high To meet the fiscal target of FY25, tax revenue growth in 4Q must be around 12% y-o-y, and expenditure growth around 7%, Both targets look achievable to us (though we may have some minor quibbles that direct tax collection looks too high, and indirect too low). Next, we look into the FY26 math carefully. Nominal GDP growth has been pegged at 10.1%, broadly in line with expectations. We believe personal tax growth of 14.4% is a tad high at a time when nominal GDP is growing 10.1%, the capital gains tax component is slowing (led partly by the recent fall in equity markets), and most importantly, the government has cut personal tax rates for FY26, and thereby foregone revenue of INR1trn (more on this later). Overall gross tax buoyancy is assumed to be 1.1, and our calculations suggest that there could be disappointment here as the year progresses. Non-tax revenues look reasonable. Dividends from the RBI and other financial institutions remain elevated at INR2.6trn (versus 2.3trn in FY25), led partly by the central bank’s FX intervention though the year. Spectrum sales numbers are a bit muted, but could be offset by slightly higher ‘other non-tax revenue receipts’. Expectations from disinvestment receipts are surprisingly muted, perhaps signalling lukewarm appetite for disinvestment. On the current expenditure front, the government expects a cut in the fertiliser subsidy bill, though a lot will depend on the FX and global commodity prices though the year. It also expects a cut in non-subsidy current expenditure, especially outlays to the telecom sector and transfers to some reserve funds (like the Guarantee Redemption Fund). Capex is expected to grow in line with nominal GDP growth, coming in at INR11.2trn in FY26 (vs INR10.2trn in FY25), and suggesting that the government intends to hold on to the capex thrust it has carefully nurtured. In fact, as we note below, the overall capex thrust is higher than it looks at first glance. In fact, we find that the quality of expenditure continues to improve, though more gradually now (see exhibit 4). All told, we think that with careful pruning, expenditure numbers can be met, while tax revenues could disappoint mildly. Gross versus net market borrowing In line with the fiscal consolidation, the government announced net market borrowing of INR11.5trn in FY26, lower than INR11.6trn in FY25. But because the redemption bill for FY26 is rather high (at INR3.3trn), gross market borrowing came in higher than a year ago, at INR14.8trn (versus INR 14trn in FY25). As the year progresses, the government may use more short term borrowing or get a higher collection from the small saving scheme than has been budgeted, resulting in lower market borrowing (see exhibit 5). But we will have to wait for several months to getclarity there. Despite higher gross market borrowing compared to a year ago in INR terms, it remains below nominal GDP in growth terms (5.8% y-o-y gross borrowing growth vs.10.1% y-o-y nominal GDP growth). And after a long wait, the RBI has also started buying government bonds. As such, the borrowings are likely to be comfortably funded. Focus areas in FY26 Consumption boost: The hallmark of the budget was the cut in personal income tax. Individuals earning up to INR1.2m per year (INR0.7m earlier) will not be liable to pay income tax under the new regime. 10m individualsare likely to benefit from this. Tax slabs and rates were changed across the board. All of this will likely cost the government INR1trn of revenue foregone. Capex diversification: The capex thrust was maintained at 3.1% of GDP (INR11.2trn, 10% y-o-y growth) despite the consumption stimulus. But there is more than meets the eye: Once we include scheme specific capex revenues transferred to states, it adds up to INR15.5trn (17% y-o-y growth). And when we add PSE capex, the number goes up to INR19.8trn (16% y-o-y growth), see Exhibit 6.The power sector is a case in point where PSE outlays have been quite high (growing 21% y-o-y). There has been some diversification in central government capex, moving away, on the margin, from just roads (1.5% y-o-y) and railways (0% y-o-y), towards urban infrastructure (20% y-o-y), housing (62% y-o-y), interest-free loans to states (budgeted at INR 1.7tr for FY26), and funds earmarked for any ministry that mayneed extra capex funds as the year progresses, see Exhibit 7. Rural spending is budgeted to be higher than a year ago, led largely by the clean water mission. Import tariffs were slashed across a variety intermediary inputs and equipment. This is expected to help India plug into Asian supply chains. Furthermore, changes are being made for easier access to export credit and support to MSMEs. FDI limit in insurance was raised from 74% to 100%. In terms of reforms, a high level committee will be tasked to lower the regulatory burden businesses face. Impact on growth The 0.4% of GDP fiscal consolidation in FY26 is likely to impart an overall negative fiscal impulse on the economy (see exhibit 8). The task of lifting growth is likely to pass on to the RBI. With inflation falling, room for rate cuts and easier liquidity has opened up. We expect a 25bp rate cut in the Feb 7 meeting, followed by another one in April, taking the repo rate to 6%. https://www.hsbc.com.my/wealth/insights/market-outlook/india-economics/consumption-capex-consolidation/

2025-02-05 21:04

Key takeaways A lack of growth and upside risks to inflation have weighed on sentiment. So far the UK has been spared from direct US tariffs threats… …but the risk remains, most notably for a handful of sectors. Sentiment in the trenches at the start of 2025 An (un)healthy dose of the January blues has seen the UK economy mired in weak sentiment in recent weeks. Business and household surveys have fallen sharply while economic growth appears to have ground to a halt in 2H24. GDP data for November showed just a 0.1% m-o-m rise while price rises slowed to 2.5% y-o-y in December. But despite that moderation in inflation, fresh upward risks – a weaker GBP, and higher oil and gas prices – have emerged adding to fears of stagflation. We judge, that despite the prospect of higher near-term inflation, that growth concerns and a softening labour market will enable the BoE to cut interest rates more meaningfully than the 80bp that the market currently expects. That could go some way to boosting sentiment as well as relieve some pressure on the government’s fiscal position. However, UK inflation expectations and sentiment more broadly have fallen foul of global developments as markets have sought to understand what the new Trump presidency will mean for the US and global economies. While the UK has been spared direct tariffs threats, for now, an uncertain global backdrop could provide a persistent volatile undercurrent for the UK economy throughout 2025. Dealing with an “America First” agenda The new Trump administration has hit the ground running with a flurry of policy actions. The latest big development is the announcement of 25% import tariffs on Canada and Mexico, although implementation has been delayed for 30 days, and a 10% additional duty on Chinese imports, effective 4 February. This could have meaningful effects on the economies involved. There’s scope for further developments. Tariff threats on Colombia relating to deportation flights shows how trade policy is being used to exert leverage on non-trade issues. And it’s also worth noting a memo signed by President Trump outlining various trade reviews by 1 April 2025 – including into persistent trade deficits, Chinese trade, the US-Mexico-Canada Agreement (USMCA), prospective new trade deals and more. What could be store for the UK? The UK has so far been spared from such direct tariff threats, partly because the US runs a small goods trade surplus with the UK. But it could be affected if the US implements a universal 10-20% tariff that targets imports from all markets (not our base case), or if more targeted duties are implemented that affect key British export sectors. https://www.hsbc.com.my/wealth/insights/market-outlook/uk-in-focus/2025-01/

2025-02-04 12:02

Key takeaways In the Indian Union Budget for FY 2026 (Apr 2025 – Mar 2026) announced on 1st February, Finance Minister Nirmala Sitharaman struck a delicate balance of providing a boost to capex and consumption while maintaining the path of fiscal consolidation. The government targets to reduce the fiscal deficit to 4.4% (from 4.8% previously) while lowering the personal income tax for the middle-income households. Individuals earning up to INR 1.2m per year will not be liable to pay any income tax. FDI limits for the insurance sector have been increased to 100% and the government has also reduced or scrapped tariffs on several capital goods and raw materials. We view the budget’s focus on boosting both consumption and capex as supportive for Indian equities, especially for the healthcare, financials and consumer-related sectors. Hence, we retain our overweight stance. Income tax cuts can lead to lesser asset quality pressure, faster deposit growth and fee income for Financials, while Healthcare should benefit from measures to boost medical tourism. Lower net borrowing and the aim to reduce central government debt/GDP ratio are positive for INR bonds. What happened? In the Union Budget for FY 2026, Finance Minister Nirmala Sitharaman struck a delicate balance of providing a boost to capex and consumption while maintaining the path of fiscal consolidation. Some of the key highlights of the budget were as follows: Fiscal discipline: In line with our expectation, the government revised their estimate for FY25 fiscal deficit to 4.8%, as the impact from lower nominal GDP growth was more than offset by lagging capital expenditure. More importantly, Finance Minister Sitharaman stuck to their prior guidance to lower fiscal deficit, despite the recent slowdown in growth and announced that they target a 4.4% fiscal deficit in FY26. India’s commitment to stay on the path of fiscal consolidation is a big positive from a macro-economic perspective. India is projected to remain on the path of fiscal consolidation Source: Budget documents, HSBC Global Private Banking & Wealth as of 2 February 2025. Past performance is not a reliable indicator of future performance. Consumption boost and Income tax cuts: The focal point of the budget announcement was the decision to cut personal income tax liability, especially for the middle-income households. Now individuals earning up to INR1.2m per year will not be liable to pay any income tax. This measure is likely to cost the government approximately INR 1tn (~USD 12bn) or 0.3% of the GDP. Capital Expenditures & Lower Borrowing: The government projected the capex to rise by around 10% to INR 11.2tn in FY26, broadly in line with the nominal GDP. This would keep capex unchanged at 3.1% of GDP. However, there appears to be a shift in focus from capex on prior beneficiaries such as roads (+1.5% y-o-y) and railways (0% y-o-y) towards urban infrastructure (+20% y-o-y) and housing (+62% y-o-y). The net government borrowing is also projected to decline towards INR 11.5tn (vs 11.6tn in FY25). FDI Limits & Tariffs: In line with the recommendation of Chief Economic Advisor, the government took steps towards further deregulating the market and has now allowed 100% FDI in the insurance sector. Import tariffs for several goods and equipment across sectors, ranging from textiles to electronics, were reduced or eliminated. The move signals India’s intention to reduce the barriers to trade and gradually incentivize the domestic manufacturers to become more competitive on a global scale. Broadly, the fiscal math seems reasonable to us, based on the assumption of 10.1% nominal GDP growth. However, projections of 12% revenue growth look somewhat optimistic. The government expects 14.4% personal income tax growth (despite the announced income tax relief). Assumptions of non-tax revenues (dividends from the RBI and PSUs) look realistic to us. Hence, we see some risk of disappointment on the revenue and overall fiscal deficit side. However, should the tax cuts unleash a rebound in spending, then the government may still be able to achieve its targets. Investment implications We view the Budget’s focus on supporting consumption and capex, while maintaining fiscal prudence as positive for Indian equities. Hence, we retain our bullish stance . Clearly, Indian equities have been under pressure since September 2024, as a combination of profit-taking, growth concerns and downward revisions of earnings estimates have led to large outflows from foreign investors. Foreign institutional investors pulled out USD 8.4bn from Indian equities in January itself. However, the potential for the recent budget announcement to uplift the sentiment, which combined with India’s more reasonable valuations, can help stabilise the flows. Domestic flows into the equity market continue to be supportive. Indian equities now trade in-line with their historical P/E premium over Asia ex-Japan equities Source: Bloomberg, HSBC Global Private Banking & Wealth s of 2 February 2025. Past performance is not a reliable indicator of future performance. From a sectoral perspective, we see the budget announcements as being positive for the healthcare, financials and consumption-related sectors. Lower personal income tax should lead to more disposable income for the middle-income households, better debt servicing and greater demand for credit cards and investment products. The healthcare sector should benefit from the push for medical tourism under the “Heal In India “ program. The impact on Industrials appears to be mixed, as the slower capex growth might be mildly negative whereas higher disposable income could lead to stronger demand for automotives. The FY26 budget doesn’t alter our bullish stance on Indian local currency government bonds. At the margin, the reduction in net supply is a positive. While the index-inclusion linked flows have stagnated over the past few months, we expect them to resume once the global uncertainty eases. We continue to expect a cumulative of 0.5% rate cuts by the Reserve Bank of India (RBI) in 2025. Therefore, investors are likely to not only receive the relatively attractive coupons, but also potential capital appreciation by maintaining exposure to bonds. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/indian-budget-threading-the-needle/

2025-02-03 12:02

Key takeaways As widely expected, the Federal Reserve kept rates unchanged at 4.25-4.50% unanimously. It seems this pause was just that and not a consideration of a change in the direction of monetary policy. We no longer expect the first cut this year to come in March but look for three rate cuts delivered in 0.25% steps at the June, September and December policy meetings. During the press conference, Jerome Powell continued to stress that the current stance of monetary policy is "meaningfully above the neutral rate”. He said that the unemployment rate has stabilised at a low level in recent months, and labor market conditions remain solid while economic activity has continued to expand at a solid pace. Powell also stated that “Inflation has eased significantly over the past two years but remains somewhat elevated relative to our 2% longer-run goal”. We maintain our overweight on US equities as we believe the fundamentals remain favourable for solid equity market returns, underpinned by lower interest rates, lower inflation, deregulation, AI adoption, and economic stability. Fixed income returns could be more muted as rates fall more slowly with the extension of the monetary policy easing cycle. What happened? As expected, the Federal Reserve kept rates unchanged at 4.25-4.50%. The decision was unanimous. We still forecast 0.75% of gradual rate cuts in 2025, which will be delivered in 0.25% steps at the June, September and December policy meetings, followed by no change in policy rates in 2026. As a result, the federal funds target range will remain 3.50-3.75% for both end-2025 and end-2026. Fed Chair Jerome Powell said on at least five separate occasions that the Committee did not need to be “in a hurry” to make further adjustments to policy rates. The FOMC’s latest assessment follows another year of economic growth outperformance relative to expectations. Powell continued to stress that the current stance of monetary policy is “meaningfully” above the neutral rate”. If policy is still that restrictive, it would not take much to restart interest rate cuts. If policy is much closer to neutral, the bar to restart cuts is higher. Fed easing will be less aggressive than the last tightening cycle Source: Bloomberg, HSBC Global Private Banking as of 29 January, 2025. Forecasts are subject to change. On the economy, Chair Powell stated that “the unemployment rate has stabilised at a lower level in recent months, and labour market conditions remain solid” and that the “economic activity has continued to expand at a solid pace”. Powell said the Fed feels it is “meaningfully restrictive” and doesn’t need inflation to hit the 2% target to begin easing again. He said, “the Fed just needs to see further progress”. Inflation has eased significantly over the past two years but remains somewhat elevated relative to the 2% longer-run goals. Housing inflation is set to decline this spring. Tariffs were lifted from 2018-2019 and US inflation slowed in the subsequent year. Strong US dollar means imported goods prices should remain muted. DeepSeek deflation: the innovation implied by this next generation of AI, suggests the possibility of less demand for computers, storage and energy in future. However, it remains to be seen if AI adoption could pick up pace due to this lower price point, thereby fuelling higher productivity and lower prices. Investment implications US economic growth remains healthy and well above the long-term trend. Dollar strength should continue as other central banks could ease more aggressively. US dollar-denominated investing should remain popular with global investors, driving asset flows and the currency. The technology revolution is just beginning and the productivity enhancing technologies that will diffuse throughout the economy should lift growth, reduce costs and expand profitability. The reindustrialisation of the US continues, and construction of new manufacturing facilities remains quite strong. Near/onshoring of jobs and the securing of supply chain remains a major theme for US corporations. This will continue to be a factor stabilising labour markets and creating wealth. For US equities, the fundamentals remain constructive. However, with a less aggressive Fed easing cycle, the slightly more hawkish tone to monetary policy will have to be offset by increased fiscal stimulus and better economic growth, which the Fed is forecasting. This would allow the earnings-led bull market to broaden out. From a sector perspective, interest rate relief will probably be less dramatic, and the growth imperative remains. Interest rate sensitive sectors should see a less emphatic stimulus from lower market rates. The growth emanating from technology revolution should be positive for the technology, communication services and healthcare sectors. Also, the increased demand for energy from the adoption of these technologies is positive for industrials. Lower interest rates, a positive slope to the yield curve and less regulation should culminate in better economic growth, increased M&A and possibly more IPOs, all of which would be positive for the financial sector. Fixed income returns could be more muted as rates fall more slowly with the extension of the monetary policy easing cycle. If the ongoing backdrop of solid growth is coupled with further disinflationary momentum in the next months, it will extend the Goldilocks scenario. This would be supportive of a risk-on stance, and therefore, we remain overweight on US equities in our asset allocation. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/cautious-fed-pauses-awaiting-further-evidence-of-lower-inflation/