21 September 2023
Federal Open Market Committee (FOMC)
- Federal Reserve stays paused; current Fed Funds Rate (FFR) still at 5.25% – 5.50%. True to initial market consensus, the US Federal Reserve (Fed) maintained the FFR at the range of 5.25% – 5.50%. The September meeting decision was unanimous among Fed voters, with the significant events being upward revisions in the US economic projections and slight modifications to the dot plot.
- Fed statement largely unchanged; economic projections and dot plot point towards higher for longer. The Fed statement saw no major deviations from the previous meeting, although the Fed has revised its description for US growth from “moderate” to “solid” in view of resilient economic data. Fed economic projections on the other hand saw significant upward revisions, especially in terms of Gross Domestic Product (GDP) growth and unemployment. Notably, the dot plot projections showed higher for longer rates for the next 3 years, while the 2023 median expected FFR was left unchanged at 5.6% (leaving room for another rate hike in 2023).
European Central Bank (ECB)
- ECB resumes with a 10th consecutive hike; 25bps increase brings deposit rate to 4.00%. The higher rates were expected, following a meeting of Eurozone policymakers in the week prior which saw inflation remaining stubborn at 3.2% in 2024 (June forecast: 3.0%). Nevertheless, the decision to hike for the ECB was not unanimous, given that some board members dissented. Furthermore, the ongoing weakness in major European economies (especially Germany, 4th largest world economy and expected to enter a recession) will make it tougher for the ECB to justify further rate hikes.
- Higher for longer: first part achieved following likely peaks in the US and Eurozone policy rates, but differences in economic growth could lead to different rate trajectories. Extremely elevated inflation was a common theme across developed economies worldwide throughout 2022, setting the stage for a synchronised hiking cycle which saw the Fed and ECB bring rates from near 0 (or negative for the latter) to multi-year highs. Looking forward however, the urgency for the Fed to cut rates is lower than the ECB. Case in point being that the Fed upwardly revised economic projections for the US (stronger growth, lower unemployment than initially expected) while ECB revised theirs in the opposite direction for the Eurozone. Undoubtedly, this difference can somewhat be attributed to the US economy being supported by resilient US consumer spending, whereas that has not been in the case in Europe.
- Core inflation has improved, but “higher for longer” is still in play especially for the US. The core Consumer Price Index (CPI) for US and the Eurozone have improved (4.3% and 5.3%),
with notable sub-components like core goods and shelter prices moderating from highs in 2022. However, we remain aware that going forward, a longer period of high policy rates is very likely for the US due to its economic resiliency (strong consumption plus stable unemployment). The caveat for an extended period of high rates in the US is that headwinds for the US economy are building up, with notable events of concern including a
possible US government shutdown in October, strikes from automaker unions and the resumption of student loan repayments.
- US Treasury yields and Malaysian Government Securities (MGS) yields rose. In response to the barrage of positive economic data and recently concluded Fed meeting, US Treasuries (USTs) yields rose 5 – 15 bps across with steepening on the longer end in view of the better-than-expected economic numbers. The MGS market was also impacted with the yield curve rising 5 – 10 bps points, also with steepening at the longer end. 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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