QuickScan: External Macro Factors Still Positive

In early January, we wrote that we were seeing early signs that the external macro environment could deliver some much-needed support to China’s economy and industrial firms this year (see QuickScan: Can the External Macro Environment Prove to Be a Boon?). We believe this thesis is still intact despite signs of rising trade tensions and re-adjusted market expectations regarding interest rate cuts and inflationary pressures in the US. In this QuickScan, we provide an updated analysis and look at potential implications for asset classes.

Since late last year, yields on 10-year Treasuries have retreated from their peak amid market expectations of lower rates this year. Although they have rebounded from their lows in late December and early January, as inflation in the US has proven stickier in the last two months, they remain substantially lower than the highs hit last year. The USD has also lost some of its strength, though it has recovered some ground in recent days, as the market has begun to scale back its expectations for aggressive rate cuts from early this year. Historically, a weaker DXY and lower rates tend to have a favourable effect on US manufacturing activity.