• US inflation remains too high for comfort, Jerome Powell shared his concern

• The Fed will take careful measures not to overkill inflation at the expense of growth

Jerome Powell, the US central bank governor, was outright when he mentioned that inflation in US remains ‘too high for comfort’ and hence, the central bank that is ready to clamp prices further. This statement, revealed during the recent Jackson Hole Symposium, is a sign that there could be one more rate hike until 4Q. Note that there will be 3 more US monetary policy meeting in 2023 including in September (20th), November (1st) and December (13th). In any case, we think the next rate hike could take place in 4Q before being kept steady until 1Q24. That said, the next rate cut in now expected to take place in 2Q24 onwards. The Fed remains steadfast that any monetary step will be based on ‘balanced assessment’ and hence, data dependent strategy. Therefore, rate hike in 4Q still depends on how inflation and labour market dynamics unfold by then. The 525 bps increase in FFR since last year could be sufficient to keep inflation cool however though anything is possible given the sizzling US labour market condition. With that, US job openings numbers for July (release date: 29th August; Tuesday) and US unemployment rate for August (release date: 1st September; Friday) will be an event to watch for. In any case, US job openings have shown signs of cooling down from its peak 10.8mn in January and 11.2mn in July 2022 (1-year high) to 9.5mn in June this year (COVID-19 low: April 2020; 4.6mn). Further slowdown of this key indicator will sooth sentiment, sparking buying interest particularly in EMEs equity market. US unemployment rate, on the other hand, proved to be a ‘tough nut to crack’ given its unexpected volatility so far. It remains close to January’s numbers of 3.4% after July numbers that slid back to 3.5% against June’s of 3.6%. This is still far off compared to the Fed’s year-end target of 4.5%. Note that consensus is projecting August numbers (release date: 1st September) to remain steady at 3.5%, expected to be unchanged against July, rightly so given the still sizzling US job openings (July: 9.5mn).

As the interest rate upcycle in US could be ‘work-in-progress’, investors should train their eyes on key announcements including US Conference Board Consumer Confidence (release date: 29th Aug; Tuesday), US August unemployment rate (release date: 1st Sept; Friday) and US August CPI (release date: 13th Sept; Wednesday). Sentiment may remain driven by US unemployment rate given its wide gap against the Fed target, consistent with Jerome Powell data dependent strategy. Having said that, we foresee downside risk to FBMKLCI next week given this latest development. Market sentiment may also dampen by a holiday-shorten week as some FMs may take extended holiday given Independence Day holiday on 31st August and also the 1-week school holiday. We also foresee downside risks to Ringgit and regional currencies and for that matter, several consumer sector players given their dependence on input cost from abroad that is priced in USD.

Source: BIMB Securities Research - 28 Aug 2023