On: March 22, 2023 In: Blog, Fixed Income, Knowledge Centre
  • Federal Reserve hikes by 25 basis points (bps), current Fed Funds Rate at 4.75% – 5.00%. Despite the backdrop of turmoil in the US banking sector1 and still-elevated inflation, the US Federal Reserve (Fed) opted for a 25bps increase to bring the Fed Funds Rate (FFR) to a target range of 4.75% – 5.00% in March. We note that the Fed’s rate hike decision in March was far from straightforward with markets initially expecting a 50bps rate hike as stubborn inflation data surfaced, before swinging to a pause as investors digested the fallout from the Silicon Valley Bank and Signature Bank failures.
  • Fed maintains flexibility to raise rates, but tones down hawkishness. We detect a moderation in Fed hawkishness, following adjustments to the Federal Open Market Committee statement. Key changes include mention that “some additional policy firming may be appropriate” after stating that “ongoing increases in the target range will be appropriate”. The recent turmoil in the US banking industry (and ensuing tightening in financial conditions) would have reduced the aggressiveness of interest rate policy despite stubborn February inflation. Furthermore, credit growth is likely to decline following the cumulative interest rate hikes, exacerbated by the recent instability in US banks. This would help the Consumer Price Index (CPI) to decline further.
  • US inflation outlook remains far from Fed target, focus fully on stubborn price of services and shelter. For now, the rapid decline in inflation seems to have plateaued despite disinflation in goods due to elevated services inflation (Jan’23 CPI: +6.4% YoY; Feb’23 CPI: +6.0% YoY). Core CPI remains elevated with about 70% of the overall inflation increase attributable to sticky shelter prices. Thus, in order for inflation to fall further, services and shelter prices will need to fall meaningfully. While US rents have been declining slightly in recent months, we expect meaningful improvements closer only towards 2H23 as there is a lagging impact of lower rents on shelter CPI. Furthermore, wage growth in service industries remain strong, which is another obstacle towards lower services prices as wages tend to form the bulk of the cost for service providers.
  • Malaysian bond market relatively insulated from volatility in US markets. Bank Negara Malaysia’s (BNM) decision to pause again in the Monetary Policy Committee (MPC) for March was largely to the benefit of Malaysian fixed income market participants, as BNM cited slowdowns in the external environment and the need to assess the lagging impact of rate hikes. Furthermore, the volatility prominent in US yields (with double-digit basis point swings) was mostly absent in the Malaysian bond market. The US banking crisis has not spilled over to Malaysia. We also remain comforted by the sufficient capitalisation and liquidity levels of the Malaysian banking sector. Thus, our house view calls for only one more rate hike of 25bps in Malaysia, with a growing possibility of no rate hikes although this is dependent on inflation and growth declining. The worsening risks of a slowdown in developed markets and greater probability of lower inflation by the second half of 2023 would be constructive for Malaysian bonds going forward.

1 For a primer on recent events, head over to our blog for an article that discusses the developments and implications of the turmoil within the banking industry (https://www.opusasset.com/knowledge-centre/implications_global_bank_hysteria/).


The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity. Individual investors should contact their own licensed financial professional advisor to determine the most appropriate investment options. This material contains the opinions of the manager, based on assumptions or market conditions and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information provided herein may include data or opinion that has been obtained from, or is based on, sources believed to be reliable, but is not guaranteed as to the accuracy or completeness of the information. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Opus Asset Management Sdn Bhd and its employees accept no liability whatsoever with respect to the use of this material or its contents.