Macro Insights Weekly: Choppy waters
- Savings have gone back to pre-pandemic levels; more draw-down to support consumption is unlikely
- Higher interest rates are unhelpful for financing home and durable purchases
- High inflation has dampened sentiments
- Strong dollar will sap company earnings
- We find contrasting upside in Asia’s export and tourism-dependent economies
Commentary: Choppy waters
Interest rates may be up, Q122 GDP may have been characterised by a small sequential contraction, and the confluence of high inflation and the war in Ukraine may have dampened sentiments, but US consumers are not daunted, at least not yet. The job market is tight, unemployment is down sharply, labour force participation rate is improving, and wages are rising robustly. The housing market, despite a sharp rise in mortgage rates, remains benign.
But the going is to about to get tougher, we’re afraid. Firstly, recent consumption strength was helped by a drawn-down of personal savings, which itself had been boosted by government transfers in 2020-21, This dynamic has largely run its course. At the end of March, US consumers’ personal savings rate was down to 6.2%, reversing the entire bump experienced over the past two years. Between high inflation offsetting nominal wage gains and declining financial buffers, consumption growth may well stall.
Secondly, interest rates are rising, which cannot help financing needed for mortgages or durable goods purchases. One can argue that households’ net debt is negligible, that banks have plenty of liquidity, and exposure do variable rates is modest, but the fact remains that higher cost of financing is unhelpful for the consumption outlook.
Thirdly, high cost of food and fuel is bound to dampen consumption sentiment. US consumer confidence index has been declining steadily since April 2021, which would end up softening actual consumption sooner than later.
Finally, the 8.5% appreciation of the US dollar index so far this year will have a negative impact on the earnings of US companies. With about a third of the earnings of S&P500 companies coming from overseas sales, the US dollar’s sizeable strength would begin eating into their financial performance, subtracting momentum from the labour market.
Add to this (i) uncertainty around the war in Ukraine, (ii) the lack of fiscal support this year, and (iii) concerns around China slowdown, US households and businesses are entering choppy waters for the rest of 2022, in our view.
Is there anywhere to look for solace given the challenging US outlook? From a valuation perspective, Asia looks attractive, in our view. Commodity exporters like Australia, Malaysia, and Indonesia, and tourism-dependent Thailand and Vietnam have favourable prospects, while the many export-oriented economies in the region will benefit from their currencies weakening against the soaring dollar. As for China, it looks gloomy presently, but we are sure that many supportive monetary, fiscal, and structural measures are in the pipeline. Of course, Asian economies, like others, will have to deal with rising inflation and rates this year, but their strong exports base and re-opening dynamic from the pandemic-lockdown are likely to be strong mitigants.
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