Any stock benefit from this???
- The FOMC voted unanimously to raise the target range for the federal funds rate by 25bps to 0.50-0.75%.
- Assessment of the US economy was more upbeat. The FOMC said the labour market continued to strengthen and overall economic activity has been expanding at a moderate pace. Consumer spending has been rising moderately but softness in investment remained.
- Market-based measures of inflation compensation moved up considerably but are still low while most survey-based measures of longer-term inflation expectations are little changed.
- After downgrading projections steadily in previous meetings, forecasts in the near-term were tweaked slightly higher while long-run projections were unchanged. 2016 and 2017 GDP growth forecasts were higher at 1.9% and 2.1% (Sep: 1.8% and 2.0% respectively).
- Projection on unemployment was tweaked slightly lower for 2016 and 2017 (4.7% and 4.5% respectively; Sep: 4.8% and 4.6% respectively).
- Estimates of headline PCE deflator for 2016 was revised higher to 1.5% (previously: +1.3%) while 2017 was unchanged at 1.8%. Core inflation remains unchanged.
- Consequently, FOMC members’ projection of fed fund rate was raised by an additional 25bps for 2017 till 2019 (2017: 1.4%; Sep: 1.1%; 2018: 2.1%; Sep: 1.9%; 2019: 2.9%; Sep: 2.6%).
- The FOMC statement was less dovish as the Fed expects slightly faster economic growth and headline inflation, leading it to raise its interest rate forecast gradually. However, the Fed also noted that the risk appeared ‘roughly balanced’ and emphasized that future moves will be data-dependent.
- Notwithstanding the improvement in most economic data and expectations of sizeable fiscal stimulus under the new President-elect, we opine that optimism will moderate in early 2017 due to i) winter season leading to slower economic activities ii) higher interest rates presaging lower housing affordability iii) strong USD weighing on corporates’ profitability. Meanwhile, productivity growth continued to moderate as businesses have yet to increase capital spending while ageing population remains an issue.
- Given the moderate increase in growth projections amid external uncertainties, we maintain our expectations for FOMC to have two rate hikes in 2017.
- The FOMC’s projection of slightly faster pace in its rate hike plan would induce strengthening bias in US$. In this regard, EM currencies, including MYR, may still experience weakening bias against US$. However, this is expected to be partly mitigated by Bank Negara Malaysia’s recent moves to improve the stability of the MYR. Consequently, we maintain our forecast for MYR to trade in range-bound of RM4.20-4.50/US$ towards the end-2016 and 4.10-4.40 in 2017.
Source: Hong Leong Investment Bank Research - 15 Dec 2016
- The Federal Open Market Committee (FOMC) voted unanimously to raises the Federal Funds rate by 25 basis points (bp). This brings the Federal Funds Rate range to 0.5-0.75%.
- The Fed sees three instead of two hikes for 2017. The economic projections adjustments were mild, taking GDP growth slightly higher, but not exceeding 2.1% over the next three years.
- We reiterate our view that Bank Negara Malaysia (BNM) would maintain its Overnight Policy Rate at 3.00% for next year though, in our opinion, that there is still room for a rate cut in the event of a sharp slowdown in the economy.
No surprises in interest rate hike. The interest rate hikes were as anticipated. Federal fund futures implied a 97% probability of a 25 bp rate hike just a few days before the decision. The Fed notes continued labour market strengthening and moderate expansion in economic activty cemented the case for an interest rate hike. Due to the long build-up on interest rate expectations, we believe that this moved has already been priced in and will not result in significant market movements in its immediate aftermath. Fed’s interest rate hike will only be the second hike since the 2008 financial crisis; the last interest hike was in December 2015. While core Personal Consumption Expenditure (PCE) inflation remains below the Fed target of 2.0% (1.7% in November 2016), the hike is consistent with the Fed’s commencement of policy normalisation covered in December 2015, justifies a less accomodative monetary policy given permissive economic condition and outlook.
Fed sees three hikes for 2017. More germane for the markets are the Fed’s rate outlook for 2017. The latest dot plot implies a median midpoint of 1.1375%, up from September’s projection of 1.125%; along with Fed’s gradualism, this implies three rate hikes of 25bp in 2017. Market expect at least two hikes. The Chair, Janet Yellen, emphasises the revision is “very modest”.
The economic projections adjustments were mild, taking GDP growth slightly higher, but not exceeding 2.5% over the next three years. Growth projection has been bumped up a notch to 2.1% for 2017 from the 2.0% expectation in September – 2016 growth estimates has likewise been revised upwards to 1.9% from 1.8% (See Table 1).
Low interest rate norm? Despite Fed signals for a more gradual interest rate tightening moving into 2017, inertia from the Fed’s long flirtation with ZIRP suggests that further interest rate rises in 2017 may be biased on dovishness. Continued sub-2.0% core PCE inflation reading will reinforce the doves’ case for prolonging monetary accommodativeness, particularly if US employment metrics falters in 2017. Indeed, Fed projection maintains core PCE inflation at 1.8%, only hitting the 2.0% mark in 2018.
Trump’s wild card. The lack of clarity on actual fiscal measures passed in 2017 clouds inflation and, by extension, interest rates outlook for 2017. The Chair, Janet Yellen, notes that “it is far too early to know how these (fiscal) policies will unfold”, further noting other influencing factors. However, in her clearest remark on fiscal policy, Yellen notes that “fiscal policy is not obviously needed to provide stimulus to help us get back to full employment” though she was cautious to note that she is “not trying to provide advice… as to what is the appropriate policy stance”.
As such, we do not see an immediate case in early 2017 for interest rate hike driven by fiscal policies as Fed officials gain further clarity into the fiscal direction in 2017.
Fed independence at stake. Despite the President-elect’s prior campaign rhetoric that interest rates have remained unnaturally low, we believe that it is unlikely that Trump will eventually retain central bank independence – indeed, higher interest rates will do little to avert the eventual strengthening of the USD, possibly undermining his attempts to bring back America’s offshore manufacturing.
OPR to stay pat. On the back of the expected Fed rate hike as well as the persistently weak ringgit we believe the probability of BNM to pursue a second rate cut following a 25 bp cut in July to be rather remote at this juncture. Nonetheless, in the absence of guidance of future changes to the OPR, we view that there is still room for another rate cut if there are signs that the prevailing uncertainty in the global economy would deteriorate and drag the domestic economy down sharply. On the expectation of a slightly better domestic growth outlook next year we expect there would be no change, ceteris paribus, to the OPR in 2017.
Source: Kenanga Research - 15 Dec 2016