A report by CYS Global Remit Strategic Sales Management Team
US FOMC Cautious Policy Stance | skip to SGD/CNY
On November 21, local time, the Federal Reserve released the minutes of the Federal Open Market Committee (FOMC) meeting from October 31 to November 1. The minutes pointed out that all participants agreed that the committee should continue to act cautiously and that policy decisions at each interest rate meeting should continue to be based on the totality of incoming information and its implications for the economic outlook as well as the balance of risks. The minutes did not reflect any intention to cut interest rates.
The Federal Reserve holds eight interest rate meetings every year. The minutes are a detailed explanation of the policy formation process and the logic behind the policies. They are usually released three weeks after the meeting. The Federal Reserve's last interest rate meeting agreed to maintain the target range for the federal funds rate at 5.25% to 5.5%.
Since the November interest rate meeting, Fed Chairman Jerome Powell and several other policymakers have given speeches one after another, indicating that the Fed is in no rush to further raise interest rates as inflationary pressures continue to ease at a gradual pace. Subsequent U.S. CPI (Consumer Price Index) and PPI (Industrial Producer Price Index) data showed that U.S. price pressure is weakening, so the market expects that the Fed's current interest rate hike cycle may have ended, and the timing of interest rate cuts may be brought forward.
The minutes of the Federal Reserve meeting stated that participants pointed out that U.S. inflation has slowed down in the past year but emphasized that the current inflation level is still unacceptably high. There are still upward risks to inflation, and although there are downside risks to the economy, further monetary tightening is appropriate if insufficient progress is made in achieving the inflation target.
The minutes also showed that it would be appropriate for Fed policy to maintain a restrictive stance for some time until U.S. inflation continues to decline significantly toward the committee's goals. However, the Fed meeting minutes were not enough to reverse market expectations that the Fed will cut interest rates soon.
We observe that there are three key pieces of information in the minutes of the November interest rate meeting. Firstly, at the November meeting, Fed officials shifted their focus from the amount of interest rate hikes to how long high-interest rates should be maintained. Secondly, although another interest rate hike cannot be ruled out, the Fed's continued interest rate hike may no longer be the baseline scenario. It will occur when economic data violates the committee's goals, and the Fed will move forward cautiously. Thirdly, regarding the reduction of the balance sheet, Fed officials believed that the balance sheet reduction would continue, and some participants believed that the balance sheet reduction could continue after the Fed began to cut interest rates.
After the release of the meeting minutes, market expectations for subsequent interest rate hikes by the Federal Reserve fluctuated slightly. According to data from the Chicago Mercantile Exchange's (CME) FedWatch tool, the probability that the Fed will suspend interest rate hikes and continue to raise interest rates by 25 bp in January 2024 are 95.6% and 4.4% respectively.
For the world's major central banks such as the Fed, regardless of whether officials currently support interest rate cut expectations, the downward trend in Treasury yields is likely to ease financial conditions, thereby weakening the impact of the aggressive interest rate hike policies they have implemented.
The market's expectations for the end of the Fed's interest rate hike cycle and an interest rate cut in June next year can be said to challenge policymakers' statement that they will keep interest rates "higher for longer" in the foreseeable future.
Our view is the Fed is done with its tightening cycle. We continue to hold the view that even if the Fed completes raising interest rates, it is unlikely that Fed officials will formally announce a halt to rate hikes. After all, the Fed has repeatedly surprised itself with the economy's resilience and is more willing to leave the door open to further rate hikes.
With the Fed at the end of its tightening cycle, we are beginning to see the moderate-to-soft USD profile playing out, as the FX market is forward-looking. We still think that for the market to fully support that narrative, we need to see Fed officials introduce “rate cuts” in their interest rate policy languages – which is not expected to happen until the first half of 2024. For now, we expect emerging currencies to start recovery against the greenback, with the higher-for-longer narrative fading in favor of a dovish Fed pivot.
China’s Property Support
Sources revealed that regulators are drafting a list of 50 developers that are expected to receive a series of financing support to set a bottom line for the survival of the real estate debt crisis1. Vanke, Xincheng, Longfor, and other companies have been included in the whitelist for renewal.
The renewal whitelist includes private and state-owned developers and guides financial institutions to increase their financial support through bank loans, debt, and equity financing. It is not yet certain which other developers are included in the list. The list, which has not yet been finalized, will expand the bank's previous list, which included only some systemically important state-owned developers.
This highlights the increasing efforts by regulators to rescue the real estate industry to slow down the drag on economic growth caused by record debt defaults, the suspension of many under-construction projects, and a sharp contraction in real estate investment.
Developers' dollar bonds quickly rebounded after the news broke. Vanke's 3.5% U.S. dollar bonds due in 2029 rose 3.9 cents, the biggest gain in two weeks. Longfor's 3.85% bonds due in 2032 rose 3.2 cents, and Xincheng's 4.8% bonds due in 2024 rose 2.2 cents.
On November 17, the People's Bank of China, the State Administration of Financial Supervision, and the China Securities Regulatory Commission jointly held a symposium on financial institutions and made it clear that banks, securities firms, and asset management companies should meet all reasonable funding needs of real estate developers and treat private and state-owned developers equally in terms of loans. In addition, banks are required to ensure that the growth rate of loans to private developers is in line with the industry average. As of the end of September, outstanding real estate loans across the country fell for the first time month-on-month, highlighting the downward pressure on the real estate sector.
Other indicators such as industrial production and consumption have improved in recent months, but the housing crisis is still a serious drag on the pace of economic recovery. To avoid repeating the mistake of 2014 - where excess monetary stimulus caused housing prices to double across the country in 2016 - regulators turned to a series of targeted policy measures to improve the difficulties in real estate financing and sales. These include easing home purchase loans for home buyers, reducing payment ratios, refunding income taxes, promoting urban infrastructure construction and affordable housing construction, and promising to provide RMB 200 billion in special loans to ensure project delivery for stalled housing projects. However, these refined measures have not yet reversed the downward trend of the real estate industry.
In the third quarter, China’s real estate industry GDP contracted by 2.7%, the largest decline this year. Housing prices fell by the most since 2015 in October. The effect of the rescue efforts so far is not obvious. The focus of these measures is to stimulate demand, while supply-side measures such as developers' financing needs are not strong enough.
In addition, the lack of confidence among home buyers and the market is the core problem of this round of real estate crisis. All parties are looking forward to a flood of bailouts in 2014 and a doubling of national housing prices in 2016. All these expectations are not realistic in the current context. Even if precise drip-feeding measures are adopted, regulators still need to increase the intensity of rescue measures on the premise that "houses are for living in, not for speculation”. They also need to face an insurmountable task in guiding home buyers and developers to expect improvement and enhance confidence in housing prices and the market.
We have always maintained our take that improvement in economic fundamentals is crucial to revive investors’ risk-on sentiments, and encourage foreign fund flows back into the world’s second-largest economy. For now, a weaker USD (due to softer US CPI prints) continues to favor a near-term appreciation of the RMB against the greenback. A further decline toward the psychological key 7 level before year-end remains on the cards. The recent RMB exchange rate has returned to the appreciation channel, mainly due to the continuous decline of the USD index and changes in market expectations.
At present, the Federal Reserve has announced the suspension of interest rate hikes twice in a row, and U.S. inflation has fallen back to a moderate range. The market has judged that the U.S. interest rate hike cycle is over and will choose a looser policy to support the U.S. economy. The USD index has continued to fall, and the yields on 10-year treasury bonds in China and the U.S. interest rate spreads continue to narrow. Additionally, year-end is typically the seasonal peak of foreign exchange settlement. As the demand for RMB exchange settlement increases, the RMB exchange rate is expected to rebound strongly.
Looking forward, as the unilateral strong trend of the USD index against non-U.S. currencies comes to an end, and with strong support from the steady recovery of domestic economic fundamentals, the RMB exchange rate will gradually rise back to a reasonable price range consistent with the currency value.