Central banks are loosening up

Why EV sales are slowing. # # --------------------------------------------------------------- The key takeaways today: - More G10 central banks are on the verge of cutting rates - What a weak yen means for the Japanese economy - Can China sustain its rally in equities? - Why EV sales are slowing - Briefings Brainteaser: Which sector is likely to see nearly half its tasks automated by AI? Was this newsletter forwarded to you? [Sign up now](. --------------------------------------------------------------- Major central banks are on the move The easing cycle among G10 central banks is broadening. Following recent moves by the Swiss National Bank and the Swedish Riksbank, [Goldman Sachs Research expects]( the European Central Bank and Bank of Canada to start cutting rates in June. The pace of easing is likely to be gradual because prices and wages are still growing faster than implied by central bank targets in every economy except Switzerland, and unemployment remains near pre-pandemic levels in every economy except Sweden. (In fact, it stands at a multi-decade low in the euro area.) Nevertheless, G10 central banks increasingly think that a policy rate that seemed appropriate 6-12 months ago no longer seems so now that the inflation emergency has passed, writes Jan Hatzius, Goldman Sachs' Chief Economist, in his team's report. The Federal Reserve will not be in the first wave of cutters because of the pickup in (month-on-month) core inflation during the first quarter. How much of that damage was undone in April, when consumer prices rose less than the consensus of economists' forecasts, is a matter of perspective. Based on several measures of inflation and import prices, our economists estimate that the core Personal Consumption Expenditures index increased 0.26% month-on-month in April, a pace well below the 0.36% average of the prior three months — but probably not sufficient for a July rate cut if maintained in May and June. However, Goldman Sachs Research also estimates that the market-based core PCE index rose just 0.18%, a pace that would be quite consistent with a July cut if maintained. Our economists continue to forecast Fed cuts in July and November, but the timing is sensitive to upcoming data. --------------------------------------------------------------- Japan's yen will likely remain weak for months to come In late April, the yen depreciated to 157.8 to the dollar, a level not seen 1990. On April 29 and May 2, Japan's finance ministry made two apparent foreign exchange interventions, selling dollars to shore up its currency. We spoke to Tomohiro Ota, in Goldman Sachs Research's Asia economics department, and Michael Cahill, senior currency strategist in the Global Macro and Markets Research Group, [about the yen's slide]( and its prospects over the coming year. What has driven the yen's decline this year? Cahill: First and foremost, the macro environment is weighing on the yen. The yen tends to appreciate when recession risk is high – when yields are lower, and people are worried about growth. But we've had the opposite of that recently. We've seen surprisingly resilient growth, especially in the US, which has come despite the Federal Reserve keeping its rates high. Instead of having high recession risk, we're tracking US growth at around 3% despite high yields. That combination is weighing on the yen. In March, the Bank of Japan ended its negative interest rate policy, raising borrowing costs for the first time since 2007. It also removed the cap on 10-year Japanese government bonds. How has that filtered through the economy? Ota: The consensus view is there has been no significant impact on the economy. The rate hike was only 10 basis points, which was a minimal increase. And in its March meeting, the BOJ announced that they will continue buying the same volume of Japanese government bonds every month, so it didn't signal a move to quantitative tightening. What is your outlook for the yen over the next six and 12 months, and why? Cahill: We expect the yen to remain around current weak levels over the next 6-12 months. The bottom line is that the macro environment should continue to weigh on this safe-haven currency, and the Fed cuts (and BOJ hikes) that we expect probably won't provide that much support. We think recession risk remains fairly low, and there is not much room for 10-year US yields to rally, which is what would typically strengthen the yen. The yen could weaken further if the US economy proves even more resilient than we expect, and if the Fed delivers even fewer rate cuts down the line. What is your outlook for GDP growth in the coming 12 months? Ota: Currently, our GDP growth forecast for the calendar year is 0.5%. This is lower than our initial forecast in November. The biggest reason for that downgrade is a temporary drop in consumption in the January-March period. One of the factors operating there was that some Japanese automobile companies had to close their production lines, because of problems with the quality assurance process. But that is a supply shock. It doesn't change our macro narrative. Read [the full Q-and-A]( to learn more about the yen's decline and when the BOJ might raise rates again. --------------------------------------------------------------- Is China's rebound for real? The world's second-largest economy has had a difficult couple of years, plagued by its ongoing property crisis and disappointing economic growth. But more encouraging economic data in recent months and a sharp rally in Chinese equities have begun to catch the eyes of investors. Better-than-expected economic expansion, government purchases of stock, and new regulatory measures designed to strengthen China's capital markets are among the factors driving equity markets higher, says Kinger Lau, Goldman Sachs Research's chief China equity strategist, [on Goldman Sachs Exchanges](. “After the 30% rally in the Hong Kong market and 15% rebound in A Shares, I think the sustainability of the rally will depend on one keyword: delivery,” says Kinger, who forecasts that the A Shares market will increase by 10% in the next 12 months. “First, it's about delivery of earnings. The second is policy delivery and, in particular, when and how the promised policy easing regarding the housing market, as well as equity market reforms, will be implemented.” Even as China struggles to stabilize its weak property sector, recent steps announced by the government should help shore up investor confidence from very low levels. But it will take time before fundamentals start to materially improve, says Hui Shan, Goldman Sachs Research's chief China economist. “From a fundamental point of view, I would say the good news [is] not that good and the bad news [is] not that bad, meaning [that] at this point, the investor sentiment towards fundamentals may be more in line with reality,” she says. “We feel comfortable with our 5% real GDP forecast this year, and I think the risks at this point are more balanced.” --------------------------------------------------------------- Why are EV sales slowing? Sales momentum for electric vehicles (EVs) is slowing globally. Goldman Sachs Research analyst [Kota Yuzawa says the team's bear case]( for EV sales is becoming more likely. - Used EVs are being sold for lower prices than expected, which is elevating concerns about the cost of new EVs. - Prospective purchasers may be holding off to see if government policies towards EVs will change after elections take place in key markets this year. - Meanwhile a shortage of rapid-charging stations and persistent worries about driving range are giving consumers second thoughts about buying EVs. - Goldman Sachs Research sees investment opportunities in automakers with strong balance sheets and lineups with multiple powertrains. The team expects demand for EVs to gradually grow amid the pursuit carbon neutrality. Hesitancy over EVs is pushing shoppers to consider hybrid electric vehicles (HEVs) and plug-in hybrids (PHEVs) when looking to replace their gas-fueled vehicles. “HEVs have a significant advantage in payback period compared to EVs,” Yuzawa says. He estimates the payback period for HEVs at just over three years, assuming annual fuel savings. Since the first HEVs were introduced back in 1997, consumers also have more confidence in the prices they'll fetch when it's time to sell. --------------------------------------------------------------- Briefings Brainteaser: Algorithm action On average, across industries, generative AI is expected to automate a quarter of all tasks, according to Goldman Sachs Research. Which of these specific sectors is most exposed to AI, and likely to see 46% of all its tasks automated? A) Legal work B) Computer and mathematical work C) Business and financial operations D) Office and administrative support [Check the answer here](. --------------------------------------------------------------- Goldman Sachs in the news By clicking on these links, you will be redirected to external websites that Goldman Sachs does not own or operate. 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