8 November 2024
Federal Open Market Committee (FOMC)
- The US Federal Reserve (Fed) cut its key interest by 25 basis points (bps), lowering the federal target range to 4.50% – 4.75%. This move followed a larger 50 bps cut in Sept’24 and was widely anticipated by the market. The decision was unanimous among FOMC members. The bond markets reacted positively to the cut as we saw a pull back in the treasury yields with the UST2y (4.20%) and UST10y (4.33%) falling by 6 and 11 bps, respectively, after the spike in yields following the result of the US presidential election. The dollar index (DXY) experienced broad weakness, dipping 0.8% to close at 104.33, though it partially recovered against G10 peers post-FOMC announcement. Correspondingly, the USDMYR exchange rate saw a marginal strengthening of 0.25% to 4.3825.
- The Fed appears to be less dovish; but still committed to lowering rates. In the latest monetary policy statement (MPS), the statement “has gained greater confidence that inflation is moving sustainably toward 2 percent”, was removed entirely and substituted with “the Committee judges that the risks to achieving its employment and inflation goals are roughly in balance”. Powell also mentioned that the current monetary policy is still restrictive, even after the 75-bps cut seen in September and November, and that the policy makers remain in the process of bringing rates to neutral levels. The pace of the rate cuts will remain an uncertainty as Powell emphasised that the Fed officials can take their time to lower rates because the US economy is still doing well and robust.
- Recent data continues to support the rate cut narrative as inflation continues to moderate and labour market eases. Recent inflation data shows that the Fed’s main inflation indicator the personal consumption expenditure (PCE) has moderated to 2.1% in Sept’24 (Aug’24: 2.3%) progressing well towards the Fed’s target of 2.0%. Whilst core PCE (excluding food and energy prices) remains sticky printing 2.7% in Sept’24 (Aug’24: 2.7%), Powell acknowledges that he expects there to be ‘bumps’ in the economic data. Diving into more details, on the labor front, the recent nonfarm payroll (NFP) data, albeit slightly distorted due to the hurricanes and Boeing strike, saw the US adding only 12k jobs into the economy (average NFP past 12 months: +196.5k).
Opus View
- We maintain our view that the Fed will continue its rate cut trajectory, but the pace of rate cuts remains uncertain. As such, we continue to expect volatility in the market, and that the Fed may not cut rates at each policy meetings consecutively. Policy announcements regarding trade tariffs, tax reforms, immigration, and other campaign promises from the Trump administration could impact the US inflation and economy outlook, disrupting the pace of rate cuts going forward.
- Domestic fundamentals and domestic demand to provide support to the Malaysian bond market. Despite being affected from the volatility from US Treasuries, Malaysia’s 2025 budget is seen as mildly positive for the bond market due to a projected reduction in net government bond supply. Additionally, improved growth prospects and fiscal reforms are expected to boost foreign investor confidence, potentially driving more foreign investments into Malaysian market. As such, we see any short-term volatility as opportunities to invest at higher yields.
Disclaimer
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.
