On: November 7, 2023 In: Blog, Fixed Income, Knowledge Centre

02 November 2023

Federal Open Market Committee (FOMC)

  • Federal Reserve paused for the second consecutive time, maintaining current Fed Funds Rate (FFR) at 5.25%-5.50%. This was largely consistent with market consensus expecting that November was a non-event while another 25bps hike could occur in December as implied in the September dot-plot. However, markets read the Fed speech as dovish-sounding and expect a lesser chance (20% probability) of another rate hike in December FOMC compared to (40% probability) the beginning of October.
  • Fed statement largely unchanged; press conference hints dovish pause. The Fed statement used past tense “expanded” when describing US economic activity while referring to the surprised 3rd quarter GDP growth as “strong” pace without hinting if the momentum will continue. The addition of tighter “financial” conditions in their statement implies their acknowledgement of the impact from the recent rise in long-end treasury yields. In the press-conference, Fed Chair Powell stuck to his usual “being data-dependent” and “2% inflation target” script, leaving room for future hikes. However, his remarks on “erosion on the efficacy of forecast over time” when asked about September dot-plot seem to imply waning support for another rate hike by this year-end that the market was still expecting.

Monetary Policy Committee (MPC)

  • Bank Negara Malaysia (BNM) paused for the third consecutive time, maintaining current Overnight Policy Rate (OPR) at 3.00%. This was in line with market consensus that BNM will stand pat amid moderate domestic inflation (3rd quarter average headline: 2.0%; core: 2.5%) relative to developed economies and weak external demand weighing on our manufacturing sector.
  • MPC statement saw some growth optimism, uncertainty in domestic inflation outlook and strong emphasis on weakening Ringgit. Notable mentions include signs of improvement in China’s growth and electrical and electronics (E&E) sector which could provide some support to growth in 2024. However, the government’s changes to price controls and subsidies are stated as the main determinant of 2024 inflation outlook. The key highlight was BNM emphasising the need to “manage risks of heightened volatility, including to provide liquidity, to ensure the orderly functioning of the domestic foreign exchange market”. Such strong language implies their readiness to intervene through open market operations while raising OPR was not hinted.

Opus View

  • Higher for longer at the current Fed Funds rate will be the base case for now. While the Fed language avoids signalling a premature rate pause or cut to ensure anchored inflation expectations, they are more cognizant of the risk of overtightening, especially when rising treasury yields also play a role. Headwinds such as slower job gains, resumption of student loan repayments and depletion of pandemic excess savings amid high borrowing cost will weigh on consumers in the coming months.
  • Ringgit volatility will be closely watched. The broad dollar strength led by rising yields and geopolitical tension saw central banks of Indonesia and Philippines raise their respective policy rates recently to mitigate further currency weakening. Ringgit not being spared from our regional peers, also saw about 7.2% depreciation year-to-date which caught BNM’s attention. While the effectiveness of OPR hike as a means of intervention is debatable, a significant decline in our foreign reserves would justify its case.
  • Core inflation will decline at a much slower pace justifying “higher for longer” for the US; Inflation in Malaysia will be higher but magnitude uncertain. The core Consumer Price Index (CPI) for US in September moderated slowly to 4.1% (Aug’23: 4.3%) but still away from the 2% target due to lagging effects of shelter component data and labour market tightness in the services sector. While headline inflation has declined (Sep’23: 3.7%) from its peak of 8.9% in 2022 the tail risk that could complicate this trajectory would be the geopolitical tensions in the middle east expanding further and severely affecting energy and food prices. On the local front, the subsidy rationalisation and removal of price controls will see an impact on our existing subdued inflation (September Headline: 1.9% Core: 2.5%). However, the magnitude will depend on the pace of implementation by our government notwithstanding any global price volatility risk.
  • US Treasury (UST) yields and Malaysian Government Securities (MGS) yields will remain volatile. The re-pricing for higher term premium and influx of long-duration US treasury supply will likely see further volatility and potentially higher yields. As a result, MGS movements will also take cues from UST and potential action from BNM should our Ringgit depreciate further in a disorderly manner. Despite the volatility, we remain positive that rates are near peak, and bond market remain attractive with higher yields for stable income.

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