Manulife Asset Management: Maintains forecast of three interest rate cuts in the United States this year, expects Japan to raise interest rates at least twice next year

According to the Wisdom Financial APP, Manulife Investment Management stated that currently, many economists predict that the Federal Reserve will start cutting interest rates once or multiple times in September this year, each time by 50 basis points. Manulife Investment Management's view is relatively optimistic: although there are signs of weakness in the labor market, it has not sharply declined. Substantial wage growth, coupled with continued strong business investment, are driving the resilience of the consumption market. The institution still expects the economy to significantly slow down, but predicts that the rate cuts will be maintained at a stable level of 25 basis points, rather than making instinctive reactions to individual data (such as irrationally cutting rates by a large margin). It currently maintains the forecast of three rate cuts in 2024.

Manulife Investment Management's Multi-Asset Solutions team Global Macro Strategist Dominique Lapointe and Senior Global Macro Analyst Erica Camilleri of the Multi-Asset Solutions team pointed out that since the pause in the rate hike cycle in July 2023, the Federal Reserve has been gradually easing its policies. The authorities believe that inflation has continuously fallen to the 2% target before they "have enough confidence" to start a loose cycle. Importantly, the Federal Reserve has ample time to make decisions: the economy performed well in 2023 and remained relatively robust in the first half of 2024. Therefore, when inflation unexpectedly heated up in the first quarter of this year, the authorities were able to delay the first rate cut without posing a threat to economic activity and full employment.

With inflation slowing down again in the second quarter of 2024, the Federal Open Market Committee is confident that it can continue to gradually ease its policies. At the press conference held in July (as well as in the corresponding statements), the authorities indicated their readiness for a rate cut in September and emphasized the focus on "achieving dual objectives," namely stabilizing prices and achieving full employment.

Subsequently released data undoubtedly dealt a blow to the Federal Reserve's positive view of the U.S. economy. Firstly, the July Institute for Supply Management manufacturing report recorded the fastest contraction since November 2023, with both new orders (47.4) and employment (43.4) signaling unfavorable signs for future economic activity. Secondly, the July employment report confirmed the situation that Manulife Investment Management has been expecting: job vacancies and the Job Openings and Labor Turnover Survey (JOLTS) showed a decline in hiring rates, an increase in initial claims for unemployment benefits, leading to a weakening in job growth. Job growth was 114,000, far less than the market's general forecast of 175,000.

Furthermore, excluding healthcare, education, and government employees, job positions only increased by 40,000, a worrying situation as it indicates that private sector hiring in the industry has dropped to dangerously close to a net loss level. In addition, the household survey showed a staggering increase of 420,000 in the labor force, but only 67,000 found new jobs. As a result, the unemployment rate rose to 4.3%, 0.3 percentage points higher than the Federal Reserve's latest forecast.

Manulife Investment Management stated that market commentary quickly shifted from the "risk management" mentioned by the Federal Reserve on July 31 to the urgency of easing policies. After the employment report was released, bond prices rebounded significantly, and the government bond yield curve also approached no inversion, which is a common phenomenon before the start of a rate-cutting cycle. However, Manulife Investment Management will closely monitor the data in the coming weeks to assess whether the U.S. economy needs to accelerate the pace of policy easing and whether the Federal Reserve is willing to implement related policies. Undeniably, there are more signs indicating a weakening consumer market, coupled with a sharp increase in layoffs or applications for unemployment benefits, all supporting the view that the U.S. economy is slowing down more disorderly than expected, hence the need to accelerate the pace of policy easing. On the other hand, following the initial impact on the market, economic data such as the Institute for Supply Management's services index has slightly stabilized, coupled with positive comments from the Federal Reserve, which may reduce market expectations of excessive policy easing in 2024.

In Japan, on July 31st, the Bank of Japan raised the policy interest rate by 15 basis points to 0.25%, marking the second rate hike in this cycle after abolishing the long-standing negative interest rate policy in March 2024. This rate hike came as a surprise to the market, as only 30% of economic analysts and 50% of market participants expected the authorities to raise rates. The forward-looking guidance on the policy rate path was firm, indicating that the real interest rate is too low and the impact of rate hikes on the economy is limited, signaling the Bank of Japan's determination to further raise rates and normalize policy by pushing rates up to an as yet undetermined neutral level. While the long-awaited tapering plan was less aggressive than market expectations, the firm stance on the policy rate drove the yen to rise against the dollar. If there is evidence of a sustained unwinding of the yen's carry trade that has lasted for years, it could strengthen the foreign exchange trend, with the yen-dollar exchange rate at its highest level since the end of 2023.

At the beginning of this year, Manulife Investment Management significantly revised its forecast for the Bank of Japan's policy rate hikes. Following this week's meeting, further adjustments may be necessary. The probability of the Bank of Japan raising rates again in 2024 and raising rates twice in 2025 (each time by 25 basis points) has increased. Therefore, Manulife Investment Management believes that the rate will rise to a peak of 1.0% in 2026 and expects at least two more rate hikes in 2025.

Manulife Investment Management stated that while central banks globally are in an easing cycle, the situation in Japan is quite different. Looking back at 2022 and 2023, most major central banks raised rates at the most aggressive pace in decades, while the Bank of Japan maintained its negative interest rate policy. The Bank of Japan has room to raise rates because the authorities are confident that wage growth will drive inflation to remain above the target level. However, the Bank of Japan may not necessarily intend to tighten the economy. Furthermore, given the unexpected consequences of the negative interest rate policy, the authorities are using policy to influence the local financial system by raising rates to a "normal" level.

Manulife Investment Management's stance on the Bank of Japan is stronger than the market's general expectations, therefore, it believes there is a relative value opportunity: as market expectations for further rate hikes heat up, Japanese government bond yields are expected to continue to rise, leading to interest rate differentials that support the yen; currently, the yen is strongly supported by technical factors. A favorable policy environment and corporate reforms should benefit Japanese stocks, but yen appreciation may slightly weaken the relative outperformance of Japanese stocks, while increasing market volatility