The US – Expecting a 75bps Hike by the Fed.

In line with our expectations and consensus, the Fed raised the Fed Funds rate (FFR) by 75bps, pushing the interest rates to 1.50 – 1.75%.

Inflation was the prime reason for the aggressive rate hike. Indicators such as the producer price index also continued to increase by double-digit pace to 10.8% y/y, driven by higher producer prices of food (13.3% y/y) and energy (45.3% y/y). Retail gasoline prices were still higher in the first week of June’22, averaging at US$4.88/gallon, which is 62.1% higher comparing to June 2021’s average.

The ongoing war in Ukraine will keep global commodity prices to stay high in the 2H2022 unless there is a resolution in the horizon. China’s zero-Covid policy is likely to worsen the supply chain disruptions. All of these are the main contributors to inflation in the US.

The Fed is expecting that the core PCE inflation to be around 4.3% this year (current reading 4.9%), and to recede to 2.7% in 2023, and 2.3% in 2024.

Considering the larger than expected inflation rate for May’22 and June’22, we expect another 75bps rate hike in July’s meeting, a 50bps rate hike in September’22, and another 25bps in either November’22 or December’22.

Factoring all of these, the FFR should hover around 3.00% - 3.25% by end of 2022. And we expect the Fed to settle at 4.00%-4.25% by 2023, implying another 75-100 bps hike.

Source: AmInvest Research - 16 Jun 2022