Contributed by Jeff Cheah, Strategic Sales Manager
Fed Strengthened Hawkish Stance | skip to SGD/CNY The Fed kept the federal funds rate target range at 5.25% to 5.5%, and its latest quarterly forecast showed that 12 of 19 officials favored another rate increase in 2023. The September FOMC meeting decided to hold steady and not raise interest rates, which is completely consistent with market expectations.
At the same time, the changes in the meeting statement were also very limited and were similar to the previous FOMC and Powell’s speeches at the Jackson Hole meeting. In contrast, the Fed's adjustments to economic forecasts have attracted more attention, especially the reduction in the number of interest rate cuts next year and the substantial increase in economic data forecasts in the dot plot, which has triggered violent market fluctuations.
The meeting sent a signal that interest rates may stay higher for longer. Policymakers expect less easing next year. This meeting raised the interest rate endpoint in 2024 from 4.6% (implying 4 interest rate cuts) to 5.1% (implying 2 interest rate cuts), which is in line with the CME interest rate futures expectation before the meeting that it would start around June to July 2024.
In the face of still strong economic data and inflation that has fallen overall but has not yet reached its target, we believe that the Fed's best stance is to stay pat on rate hikes. As long as there is no large-scale supply shock, the possibility for radical interest rate hikes is remotely distant. However, having learned from previous lessons and coupled with the current variables that still exist (such as rising oil prices, strikes by the United Auto Workers, etc.), the Fed is also worried about unexpected supply disturbances that will frustrate efforts to control inflation that have shown some glimmers of hope.
Therefore, whether it is the dot plot expectation of another interest rate hike during the year or the decrease in the number of interest rate cuts next year, it will prevent the market from rashly trading before the end of interest rate hikes or the arrival of interest rate cuts, which will instead affect inflation expectations and paths. This also means that the effect of the dot matrix is more of a "deterrence" to guide expectations, rather than an absolute guide for actual operations. On the contrary, each adjustment in the dot plot is also huge, which fully demonstrates that changes within one quarter can change many expectations. Therefore, we opine that there is no need to regard current changes as absolute guidance for the future.
Fed Chair Powell's statements at the press conference also conveyed similar messages, such as "want to see more progress before we reach that conclusion" and "maintain the policy and await further data” which also means that future economic data will be more important. He further added that we are "prepared to raise rates further if appropriate, and we intend to keep policy at restrictive levels until we are confident that inflation is sustainably declining to achieve our goals."
It is still necessary to observe future data, but two points may be relatively clear. Firstly, the probability and necessity of radical interest rate hikes have decreased. Even if there is another rate hike in the fourth quarter, the expected impact may not be great. Although the recent rise in oil prices has led to a rebound in overall inflation, core inflation is still in a downward range, which means that the current monetary policy is effective. However, due to factors such as the transmission lag from this round of monetary tightening to credit tightening, interest rates need to be maintained at a higher level for a longer period i.e. higher for longer.
Furthermore, if oil prices do not continue to rise, overall inflation may return to decline next month. Even under the potential transmission risk of oil prices, if the Fed chooses to raise interest rates again, it may be communicated in advance for a long time. Similar to the interest rate increase in July, the impact on the market may not be great.
Secondly, it will take longer to cut interest rates, and the magnitude may be lower than market expectations unless there is a systemic risk or a sharp recession. Unlike raising interest rates, the condition for lowering interest rates is economic pressure. However, in the context of residents' healthy balance sheets, it is difficult for this round of economic downturn to enter a more serious recession, which means that the interest rate cuts may be very small.
At this juncture, we see the USD supported on the back of the hawkish Fed stance at the FOMC. We opine that it will take a dovish pivot/cue from Fed officials before we see a softer USD profile.
Mood of Optimism Present Post-Aug Data Prints
The effects of China’s policy stimulus continue to take center stage as data shows that economic recovery remains on a bumpy path. We see most economic indicators improving marginally. In August, the growth rate of value-added of industrial enterprises was above the designated size, and total retail sales of consumer goods recovered. The decline in both imports and exports narrowed while the CPI turned positive. The declines in PPI and corporate profits continued to narrow. The manufacturing PMI edged higher but continues to stay in contraction territory. There appears to be some emergence of bright spots, and social expectations have improved, but we remain cautious about being overly optimistic at this juncture.
Domestic demand continued to recover in August, with the growth rate of total retail sales of consumer goods accelerating by 2.1 percentage points from the previous month, but the consumption sector still faces headwinds. We see production and supply increasing steadily. The growth rates of the value-added of industrial enterprises above the designated size and the service industry production index increased by 0.8 and 1.1 percentage points respectively compared with July. The growth trend of service industries such as tourism and travel, culture, and entertainment was encouraging, especially in the tourism and travel sectors where high-speed rail tickets are hard to come by.
Structural adjustment in the economy was steadily advanced. In the first eight months, the growth rate of investment in manufacturing and infrastructure was 2.7 and 3.2 percentage points higher than the overall level respectively. Investment in high-tech industries was 8.1 percentage points higher than the overall level, playing a key role in optimizing the supply structure. High-end manufacturing and high-tech service industries maintain rapid growth, and green transformation and the digital economy are injecting new vitality into industrial upgrading.
The resilience of major economic provinces was also highlighted. In August, Guangdong’s RMB-denominated foreign trade import and export growth increased to 10.2%, reaching double digits. In the first eight months, the growth of newly established business entities in Zhejiang was 12.5%, which was also a double-digit figure.
Social expectations have also improved. The manufacturing purchasing managers index (PMI) continues to rebound, while the new orders index, service industry business activity index, and business activity expectation index are all above the expansion range. It can be argued that the data-prints in August have created a “mood of optimism” for the continued economic recovery in the next step. However, we cautioned against riding too heavily on that mood as China’s economy still faces numerous challenges, especially its heavily indebted property sector.