• The US May CPI data came in lower than expected. The latest Federal Reserve decision kept interest rates unchanged but raised long-term rate forecasts, with the dot plot predicting only one rate cut this year - in line with our anticipation in previous reports. (2024 Q2 Global Economic Outlook (I) - US and Europe & 2024 Q2 Global Economic Outlook (II) - Japan and China)  
• Inflation in Japan continues at a gradual pace, prompting expectations that the Bank of Japan (BOJ) will adopt a more hawkish stance. While an immediate rate hike is unlikely, the BOJ is expected to implement corresponding measures in the latter half of the year to address inflationary pressures.
• China’s May CPI rose 0.3% YoY, marking a steady, moderate growth for the fourth month in a row. Despite this growth, deflationary pressures persist, and the transforming towards a consumption-driven economy remains a long-term challenge.
• In the recent European Parliament elections, the ruling parties in Germany and France suffered defeats, indicating a resurgence of nationalism and populism. This shift raises concerns about the stability of the EU's unified policy framework as it faces increasing challenges.

United States

US May Consumer Price Index (CPI) data revealed a more pronounced easing of inflation than anticipated, marking the slowest core CPI growth since 2021. This significant development comes as the Federal Reserve, following its recent FOMC meeting, opted to maintain steady interest rates, aligning with market expectations. However, in a critical adjustment to its projections, the Fed's dot plot now indicates a more cautious approach with only a single rate cut forecasted for this year - in line with our anticipation in previous reports. (2024 Q2 Global Economic Outlook (I) - US and Europe & 2024 Q2 Global Economic Outlook (II) - Japan and China)  

The Federal Reserve has recently adjusted its forecast for long-term interest rates, signaling a notable shift in economic outlook. This adjustment reflects an anticipated persistence in inflationary pressures, suggesting that high levels of inflation may linger longer than previously expected. The latest data from May's non-farm payrolls and wage reports surpassed market expectations, not as a surprising anomaly but rather as an adjustment aligning with ongoing inflationary trends.

In a remarkable surge, the S&P 500 Index has historically climbed past the 5,400-point mark, propelled by the dynamic growth and integration of AI technologies. This momentum has driven the market to new record highs, with leading companies in the AI sector continuing to post robust profits without signs of deceleration. The optimism generated by these industry frontrunners has spilled over, lifting other constituents of the index as well. However, any emerging signals of a slowdown could impose greater pressure on the market, potentially testing its resilience in sustaining these elevated levels.

As the US election approaches, market expectations lean towards a potential victory for Trump reclaiming the White House. In the lead-up to this critical event, both political parties are anticipated to implement strategies to inject resources into the economy. This injection of liquidity is likely to be funneled into the infrastructure sector, a move aimed at spurring growth and modernization. Additionally, efforts to bolster wage growth are expected, reflecting a commitment to enhancing economic prosperity and addressing voter concerns.

Japan

The BOJ has gradually adjusted its monetary policy, shifting from an extremely loose stance to a slightly less accommodative approach. Despite this subtle change, the progress remains measured and deliberate. Market sentiment reflects a consensus that the BOJ is unlikely to implement any rate hikes in the near term, maintaining a stance that will keep the yen on weak side.  

Recent wage data has exceeded expectations, marking a significant upturn in real household spending for the first time since February of last year. While the volatility in energy prices has a muted effect on the average person's daily life, thanks to government subsidies, the pressure of inflation is still palpable across various fronts. Beyond the official figures, everyday experiences in areas like education and routine expenses reveal the ongoing strain of rising costs.

The BOJ finds itself in a precarious position as the effects of wage growth and imported inflation begin to manifest more clearly. This situation is complicated by visible tensions between the Ministry of Finance and the BOJ, which, although understandable given their differing mandates, underscore a broader policy discord. The BOJ's continued dovish stance, aimed at sustaining economic stability, risks amplifying inflationary pressures on the public. This is particularly troubling against the backdrop of the current Prime Minister's stagnant approval ratings, a scenario the government is keen to avoid.

Despite a slightly weakening of the US dollar following the Federal Reserve's release of CPI data, the yen did not experience a significant appreciation and continues to depend heavily on support from the BOJ. Given these dynamics, it is anticipated that the BOJ will adopt a more hawkish stance moving forward. While an immediate surprise rate hike seems improbable, it is expected that the BOJ will implement measured adjustments in the latter half of the year. We expect the yen to reach 143-148 by year-end.

China

China's May CPI rose by 0.3% YoY, marking the fourth straight month of moderate growth, mainly due to higher pork and fresh vegetable prices. Non-food prices increased by 0.8% YoY, while energy and service prices saw declines. Core CPI grew steadily by 0.6% YoY. On the production side, PPI decreased by 1.4% YoY. However, this decline narrowed with a 0.2% MoM increase, breaking a six-month downward trend, largely driven by rising metal prices. Looking ahead, CPI is expected to rebound modestly to between 0.5% and 1% by year-end, and PPI deflation is anticipated to ease further as the impact of increasing commodity prices stabilizes the production sector.

China's economic momentum continues to be anchored by three key pillars: real estate, infrastructure investment, and export-driven growth. Although regulators are consistently introducing policy stimuli, the real estate sector's recovery remains slow and requires ongoing support. With the yuan weakening, exports are set to dominate as the primary growth engine, bolstered by substantial government-led infrastructure investments.

Deflationary pressures persist in China, and the transforming to a consumption-driven economy remains a long-term challenge. Market sentiment towards the China/HK stock markets remains cautious. The Hang Seng Index, after substantial gains in recent months, has pulled back due to cheap valuations and short-term fund rotation. Breaking through the 19,500 mark remains a significant challenge amidst ongoing headwinds.

Europe

In the recent European Parliament elections, the ruling parties in Germany and France experienced significant losses, signaling a resurgence of nationalism and populism across Europe. This shift challenges the EU's ability to maintain a unified policy stance, contributing to the euro's decline to a one-month low. Meanwhile, the ECB’s preferred wage measure index accelerated in the first quarter, highlighting persistent inflationary pressures. ECB President Christine Lagarde emphasized that the battle against inflation is far from over, urging continued vigilance from officials.