PublicInvest Research

Author: PublicInvest   |   Latest post: Tue, 12 Nov 2019, 9:48 AM


PublicInvest Research Economic Update - FFR Is Put on Hold in 2019

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The US Federal Reserve (FED) has put on hold the movement of Federal Funds rate (FFR) in 2019, a surprise change from its previous decision to undertake 2 more hikes this year (2018: 4x). The previous decision was made under different circumstances, before intensification of the trade collision with China. Clouds have turned darker following the longer-than-expected negotiations, with this rate decision also accompanied by a cut in 2019 expectations for economic growth, inflation and unemployment. FED officials now see economic gains of just 2.1% this year, down from the 2.3% estimated in December, and inflation only reaching 1.8%, a 0.1-pps reduction. The unemployment rate for this year is now seen at 3.7%, up 0.2-pps from December.

Weaker household spending and business fixed investments in 1Q have been cited as reasons for the slowdown although we think the 35-day government shutdown in January and diminishing impact from tax cuts and fiscal stimulus have also thrown a spanner in the works. Above all, strength of the Dollar has been hurting the US economy, worsening its imbalance positions amid full employment and rising wages. This could have tipped the balance further should the FFR get adjusted if based on earlier interest rate guidance. Inflation, meanwhile, may slow down in view of the anticipated drop in energy prices on the back of rising US oil production which is projected to be 3.3% higher in 2019 to 12.3mn barrel per day - bpd (2018: 11.9mn bpd).


This new prospect will bring resonating impact across the global capital, currency and asset markets with emerging market economies (EMEs) standing to benefit the most. To begin with, the pause in FFR may be a conduit to a normalization in global financial conditions which has been affected by the US policy moves. This could shore up risk tolerance and bring down risk premiums in EMEs capital markets which have borne the brunt of capital market volatilities. The pause could clamp volatility and push investors to resume their searches for yield in the region. In fact, Malaysia could be the immediate target driven by higher real rate of return vis-a-vis the US (with the pause) thanks to our higher interest rate and benign inflation.

Undervalued position of the Ringgit is another appealing factor for Malaysia. The huge sell down in equity and bond markets in 2018 has been deemed to be excessive and therefore regarding both markets as oversold. Interest in Malaysia could also be driven by the resumption in Dollar carry trade as the pause in US interest rate adjustment could be a while amid its challenging dynamics. Malaysia’s diversified exports could also be the pull factor especially when the other EMEs have been affected more from the slowdown in China’s trade. The government’s rapid reform efforts to overhaul the institutional quality in Malaysia are another factor that may appeal to foreign investors. The return of foreign investors to Malaysia and the rise in Ringgit could intensify after Thailand (March) and Indonesia’s (April) general elections.


The Ringgit may benefit from this new dynamic, hence our new 2019 projection of RM4.00 per Dollar (YTD 2019: RM4.04 per Dollar). Demand for Ringgit may rise from capital reorientation into the EMEs although its rise may be clamped by the limited upside of oil prices. Its ascent may also be held back by BREXIT related uncertainty and US-China trade negotiations. The negative outcome ofthe former may stoke demand for safe-haven currencies especially the Dollar and Yen. The latter may continue to weigh on EMEs as it looks set to be prolonged given the complexity and intensity of the whole situation. The US president has said that the new higher tariff on China’s goods could stay in place for substantial period of time, long after the conclusion of the trade negotiations which we fear could irk and push China to retaliate and hence, put further stress on global capital markets. All this negative sound bites are a drag on EMEs which could limit the upside of Ringgit.


Malaysia’s key indicators are set to benefit from this new dynamic especially the Ringgit and our forex reserves. Ringgit could gain from higher risk tolerance in capital markets while forex reserves could benefit from translation gains in 2019, a reverse position against 2018, though there remains uncertainty in view of the macroeconomic risks in advanced economies. The rise in Ringgit may not affect exports given the competitive Ringgit on real effective terms.

Source: PublicInvest Research - 22 Mar 2019

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