Keep cautious eye on risk of safe-haven funds

The latest data released by the US government shows that the GDP of the United States for the first quarter of the year increased at an annualized rate of 1.6 percent, lower than the expected 2.4 percent and significantly slower than the 3.4 percent growth rate in the fourth quarter of last year. The US’ core inflation rate for the first quarter was 3.7 percent, up from 2 percent in the previous quarter.

The slowdown in US GDP growth is a result of both consumer and government cooling. In the first quarter, personal consumption expenditure, which accounts for about 70 percent of the US economy, grew by 2.5 percent, a decrease of 0.8 percentage points from the fourth quarter of 2023, which is also lower than the market’s expected growth of 3 percent. Another reason is the widening trade deficit, as US exports grew by 0.9 percent while imports surged by 7.2 percent in the first quarter, dragging down economic growth due to the net exports of goods and services.

Meanwhile, the Personal Consumption Expenditures Price Index for the first quarter increased at an annualized rate of 3.4 percent, far exceeding the previous value of 1.8 percent and marking the highest growth rate in a year.

Government spending in the first quarter increased by 1.2 percent, far lower than the 4.6 percent in the fourth quarter of last year. In a high-interest-rate environment, government spending is an important driver of US economic growth, but the sustained increase in government debt and high deficits behind it are unsustainable. For the market, short-term risks include the impact of persistently high US interest rates on asset prices and economic growth, while in the long term, the snowballing size of US government debt poses a significant risk.

The current fiscal policy stance of the US is not sustainable in the long run. In addition to increasing the already heavy debt burden of the country, it may also make it more difficult for inflation to fall to the Federal Reserve’s target. However, if the US reduces government spending, its economy could immediately fall into recession.

Due to the increased uncertainty in the US economy and the expectation of higher interest rates for a longer period, both dollar assets and Asian currencies are experiencing turbulence. While the US stock market continues to decline, the yen has fallen below 156 against the dollar.

However, unlike the slowdown in US economic growth to nearly a two-year low in the first quarter and the rebound in inflation, China’s economic growth in the first quarter exceeded expectations, with inflation levels and asset prices remaining low, making China a safe haven for international capital to hedge against risks associated with dollar assets.