Treasury yields fell again yesterday, following dovish comments by a more hawkish member of the FOMC, Governor Christopher Waller. Markets are now pricing in that the Fed may cut as early as May. China is a big contributor. Excess capacity is helping to speed up the pace of global renewable energy investment, which is required for any orderly transition to net zero. Chinese renewables deflation will remain be a big global macro theme in 2024 too, helping to keep goods inflation low. Overcapacity in renewables is not without risks for Chinese companies: significant overinvestment will lead to a shakeout in 2024. With China already in a profits recession, and banks ramping up lending to renewable energy industries, this could lead to a deflationary bust. We acknowledge this risk to our outlook.
Durables CPI deflation (-2.07% y/y) in the US is more a function of China, and working through inventories, and less about weak US consumer spending. The Adobe Digital Price Index for September had shown a 4.61% y/y drop across all categories in September, including an 11.92% y/y slide in the prices of electronics. It is important to note these steep price declines when interpreting the nominal data. Adobe has reported that spending at online retailers hit a record $12.4bn on Cyber Monday, surpassing the company’s initial estimate of $12.0bn, and up 9.6% y/y.
Initial claims are still running below their 2017-19 average, as well as their 2021-22 average. Despite talk of a manufacturing recession in the US, some sectors of the US economy are outperforming. Output of selected high-technology products jumped 14.2% y/y in October. These numbers suggest high-tech investment has stayed strong, despite the recent slowdown in non-residential fixed investment. The dollar is falling, but the US should continue to outperform the Eurozone, the UK, and Japan. The US is well on track for 2% inflation. But if growth stays solid, rate cut expectations for 2024 may have to be priced out.
