News

• The Fed maintained its current 0-0.25% target range for the federal funds rate.
• Compared to the previous statement, assessment of the US economy remained largely unchanged. However, the FOMC highlighted that recent global developments have somewhat dented its economic and inflation outlook.
• It continued to mention the improvements in job gains and housing sector but cautioned on softness in net exports and inflation. Timing of rate hike is still data dependent as in the previous statements.
• 2015 growth projection was lifted to 2.0-2.3% (June projection: 1.8-2.0%). 2016 GDP forecast was tuned slightly lower to 2.2-2.6% (June projection: 2.4-2.7%).
• The median forecast of fed fund rate by FOMC members was lowered to 0.4% by end-2015 (previously: 0.625%) and to 1.6% by end-2016 (previously: 1.6%). 13 out of 17 members preferred a hike by end-2015 (previously 15).

Comments

• The FOMC statement was broadly in line with our and market expectations.
• The FOMC now confirmed that global developments are part of their rate hike equation via growth and inflation (energy prices and exchange rates) channels. It opined that policy accommodation is still needed to cement the projected economic growth path given the recent volatilities in the external developments.
• From the statement and Yellen’s Q&A, we sense that the Fed is trying to convince the market that it will go very careful on its rate liftoff to ensure that growth momentum is not jeopardized. Despite some minor changes in forecasts, the FOMC continued to uphold its rate hike intention, which is crucial to maintain the attractiveness of US$ assets.
• Given our bearish near-term view on China, we do not see any imminent change in global outlook that will materially prompt a review by FOMC, at least in the next 2-3 months. We now expect the first Fed li ftoff in Dec FOMC meeting. For 2016, we believe that rate hike will be gradual, at best, a 25bps hike in alternate FOMC meeting (total of 100bps).
• We expect the strength of US$ to taper given the dovish FOMC statement. As such, depreciation pressure on EM currencies, including MYR, will ease off in the short term.
• Closer at home, we do not see any material change to our macro forecasts for Malaysia. Coupled with measures announced earlier this week, we continue to expect a return of stability in Malaysia. We also note that GLC funds are taking heed from the government’s call to repatriate their profits back to the country, which is positive for MYR.
• We maintain MYR range forecast at RM3.55-4.20/US$ for 4Q15, with a revised year-end forecast of RM4.00/US$.
• We maintain Malaysia’s GDP growth forecast at 5.0%.
• We reiterate our view that BNM will continue to leave its OPR unchanged at 3.25% until end-2015.

Source: Hong Leong Investment Bank Research - 18 Sep 2015