US & China Start to Tighten

Both China and the US tightened monetary conditions over the past month. The US Federal Reserve acted first, raising official interest rates for the second time in 3 months, lifting the benchmark Fed Fund rate rates by 25bps to 1%. China quickly followed, leaving official rates unchanged at 4.35%, but lifting the cost of 7-day, 14-day and 28-day reverse repurchase agreements (repo rates) by 10bps each to 2.45%, 2.6% and 2.75%, respectively.

The US fed fund rate rise was widely anticipated, with both bond and currency markets taking profits post the announcement. With no material change in the Fed’s guidance on interest rates, we suspect the US dollar looks fully priced for now and vulnerable for further short term declines – particularly if new US administration cannot deliver on aggressive tax reform and infrastructure investments. The Chinese tightening looks more motivated to accommodate for stronger inflation and a heavily bought domestic property market.

Underlying manufacturing of the two biggest economies continues to look strong. China PMI rose to a 5-year high of 51.8 in March, beating market expectations of 51.6. The positive reading followed an abnormally strong February result of 51.6, which appeared to be inflated by near record new loans of CNY2.03 trillion in January. The onset of the second quarter construction season suggests the well-watched manufacturing index will remain elevated in the months ahead (as it has in past years).

The US PMI in March came in at 55.2, slightly below market expectations of 57. However, coming off an inflated level of 57.6 in February—and combined with a still very strong labour market—it is unlikely the softer number will derail the US Feds current rate hike program.

The mood on equity markets was mixed. The global benchmark, US Dow Jones hit a record high at the start of March after gaining 5% over February. The index has since drifted 1-2% lower post the hike in US Dollar interest rates. Investors have been active buyers of the domestic bourse on the promise the Trump administration would deliver strong growth initiatives. We suspect the market will now go into a holding pattern waiting for the start of the March Quarter US reporting season from the start of April. China equities have remained upbeat, with the Shanghai Composite on the verge of hitting 15-month highs at the end of March.