1) The US

• The Fed is expected to lift the fed funds rate by another 75bps to 3.75% to 4% target range as the economy shows signs of resilience.

• The stronger than expected 3Q22 GDP last week at 2.6% q/q (compared to consensus of 2.4% q/q) after 2 quarters of contraction, still strong personal consumption expenditure (PCE) growth rate at 6.2% y/y in September 2022 (Aug22: 6.2%), tight labour market where the jobs vacancies amounting up to 10.1mil, still above the pre-pandemic level, and multi-year high core inflation (6.6% y/y in September vs. 6.3% y/y in August) solidify the needs for the US Fed to fight inflation.

• Room for another75bps rate hike in December remains and with a slower pace of 25bps in January 2023 when the “slowing growth” narratives start to materialize. This will bring the FFR to settle at 4.75% - 5.00%, slightly higher than the Fed’s terminal rate.

• A clearer picture of how “divergent” the stances between the officials is expected from this meeting. More recently, a non-voting member San Francisco President Daly’s speech spurred some market optimism recently when she said that its time for the Fed to start talking about slowing rate hikes. Any dovish hint in the tone will tilt the market towards riskon mode.

• Focus will also be on PMI and labour market data where we can expect the headline readings will start to show modest contractions and downside numbers.

2) Malaysia

• Demand pull inflation is gaining momentum supported by health labour market and positive consumer sentiments.
• Manufacturing payroll as of Aug’22 has surged 7.5% y/y, the highest level since Apr’21 when it was 8.2% y/y. Plus, the unemployment rate has been trending downwards steadily with latest figure pointing at 3.7%, down from pandemic peak of around 5.3%.

• And expectations are for the 3Q22 GDP to perform better than 2Q22 GDP supported by strong exports. According to our estimates, the 3Q22 GDP will hover around 10%-12%, compared to 8.9% in 2Q22. That together with pressure on cost inflation resulting from weaker ringgit and widening interest rates differential points to a another 25bps hike by BNM in the coming MPC meeting.

• Should another rate hike materialise, it will be the fourth straight 25bps rate hike, Abd this will be the first time of such a move since OPR started back in 2004.

• We believe OPR will normalise at 3.00%, which means another hike likely in January 2023.

3) The UK

• The inflation situation is worse off than the US. The latest annual inflation rate rose by 10.1% in September from 9.9% in August, returning to the 40-year high hit in July and surpassing market expectations of a 10% rate.
• Expectations are for the BoE to raise its interest rate by 75bps this week. However, we cannot rule out for a lower rate hike of 50bps. With the new leadership changes and the ‘mini-budget’ has been u-turned, there are less pressure for the BoE to hike as aggressively as the Fed.

Source: AmInvest Research - 31 Oct 2022