In line with our and market expectations, the US Fed continued with its normalisation of interest rate policy by raising the policy rate by 25 basis points (bps) which is the second rate hike in 2017, bringing the policy rate to 1.00% to 1.25%. Interestingly, we found the Fed Chair has played down concerns on the weak inflation data that might cause the Fed to become more dovish. The Fed appears to maintain its previous guidance on the interest rate hikes going forward with little change in the language or projections for further interest rate hikes. While acknowledging inflation was running below target, it expects the solid jobs data to potentially strengthen the pace of the economic growth. The Fed’s confidence is also outlined with its plan to start implementing a balance sheet normalisation process in 2017.

We continue to maintain our base case view of a gradual adjustment in the monetary policy which should help steer the economic activity to expand at a moderate pace. Our base case scenario remains at 3 rate hikes for 2017, with the policy rate reaching 1.25% – 1.50%. We expect the Fed to continue increasing rates in 2018 to 2.00% – 2.25% with balance sheet normalisation. In line with our projection, several Fed officials are also expecting the normalisation of the balance sheet, which will see it trimmed to about US$2tril to US$2.5tril.

In the case of Malaysia, our base case remains with no change to the 3.00% policy rate in 2017, implying the real returns will remain in the negative region. However, based on the latest data, the probability for a 25bps rate hike in 2H2017 is at 40%. We are looking at 25 – 50bps rate hike in 2018.

• As expected, the US Fed continued with its normalisation of interest rate policy by raising the policy rate by 25 basis points (bps) in the latest FOMC meeting. This is the second rate hike in 2017, bringing the policy rate to 1.00% to 1.25%.

• We found the Fed Chair has played down concerns on the weak inflation data that might cause the Fed to become more dovish. Headline consumer inflation edged down 0.1%m/m in May after a small gain of 0.2%m/m in April. Prices fell in March by 0.3%m/m. Apart from weak energy prices, the drag also came from poor prices of cloth, airline fares and medical care. Meanwhile, core inflation, which excludes energy and food, rose a slight 0.1%in May. Retail sales data turned weak in May. It fell by 0.3%m/m after a gain of 0.4%m/m in April. We found May's drop to be the biggest since January 2016.

• Another sign of the Fed optimism come from its decision to maintain the previous guidance on the interest rate hikes going forward. We noticed the Fed made little change in the language or projections for further interest rate hikes. It acknowledged that inflation was running below target. However, the solid jobs data is expected to potentially strengthen the pace of the economic growth.

• The Fed’s confidence is also seen with its plans to start implementing a balance sheet normalisation process in 2017. The roll-off cap level will start at US$6bil a month for the level of principal payment proceeds from Treasuries. It plans to raise the cap level at a pace of US$6bil each quarter over 12 months until it reaches US$30bil a month. For agency and mortgage debt, the cap starts at US$4bil a month with quarterly hike of US$4bil until it reaches US$20bil a month. When both targets are met, the total run-off per month will be US$50bil.

• We continue to maintain our base case view of a gradual adjustment in the monetary policy which should help steer the economic activity to expand at a moderate pace. Our base case scenario remains at 3 rate hikes for 2017, with the policy rate reaching 1.25% – 1.50%. We expect the Fed to continue increasing rates in 2018 to 2.00% – 2.25% with balance sheet normalisation. In line with our projection, several Fed officials are also expecting the normalisation of the balance sheet, which will see it trimmed to about US$2tril to US$2.5tril.

• In the case of Malaysia, our base case remains with no change to the 3.00% policy rate in 2017, implying the real returns will remain in the negative region. However, based on the latest data, the probability for a 25bps rate hike in 2H2017 is at 40%. We are looking at 25 – 50bps rate hike in 2018.

Source: AmInvest Research - 15 Jun 2017