News

• The FOMC maintained its current 0-0.25% target range for the federal funds rate.
• Compared to the previous statement, assessment of the US economy was mixed but pointed to an overall improvement. While the FOMC said the pace of job gains has slowed, private sector spending has been rising “at solid rates in recent months”. Softness in net exports remained while inflation indicators only moved “slightly” lower.
• The FOMC removed its sentence on downside risk from global developments but said that it is “monitoring” the situation.
• Timing of rate hike is still data dependent as in the previous statements.
• No change to its macro economic projections.

Comments

• The FOMC statement was broadly in line with our and market expectations, but with a slightly more hawkish tone.
• The FOMC now downplayed the importance of global developments in its rate hike equation. We opined that with the recent stabilization in China and assurance of no more major policy moves, the FOMC can now ignore these noises and refocus on the US economic developments in determining its first rate liftoff.
• The FOMC also did not seem to be concerned about potentially further QE deployment by the ECB and BOJ, which will cause greater divergence in global monetary policy. On the US economy, we opine that the FOMC has upgraded its assessment by mentioning “solid” consumer spending and business fixed investment. The improvement in job market, despite slower job gains in recent months, is already within the safe zone of FOMC for a rate liftoff.
• The FOMC reiterated its commitment that it will go very careful on its rate liftoff to ensure that growth momentum is not jeopardized.
• We opine that the clarity of a December rate hike is now higher. We maintain our call for the first rate liftoff 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).
• Coupled with the possibility of more QEs by the ECB and BOJ, we expect the US$ to regain strength. As such, depreciation pressure on EM currencies, including MYR, may escalate into end-2015.
• Closer to home, MYR has recently enjoyed a period of stability, given the abated foreign selling, rebound in BNM’s foreign reserves and better clarity of domestic growth outlook. However, the slightly hawkish FOMC statement and potentially more QEs by the ECB and BOJ may lead to a renewed strength in US$. Consequently, we now expect MYR to remain weak until end-2015. Our MYR year-end forecast is now revised to RM4.30/US$ from RM4.00/US$.

Source: Hong Leong Investment Bank Research - 29 Oct 2015