News

• The FOMC maintained its current 0.25-0.50% target range for the federal funds rate.

• Assessment of the US economy was mixed. The FOMC said pace of labour market improvement has slowed but overall economic activity has picked up. Consumer spending picked up but softness in investment remained.

• The FOMC remain wary that global economic and financial developments continue to pose risks.

• Economic growth projections were again tweaked lower. 2016 and 2017 GDP growth forecasts were trimmed to 2.0% (Mar: +2.2% and 2.1% respectively).

• Projection of unemployment remained unchanged (2016: 4.7%; long run: 4.8%).

• Forecast of both headline and core PCE deflator for 2016 was revised higher to 1.4% and 1.7% respectively (previously: +1.2% and 1.6% respectively).

• FOMC members’ projection of fed fund rate was maintained at 0.9% for 2016. However, projections for 2017 and 2018 were scaled back to 1.6% and 2.4% respectively (previously: 1.9% and 3.0% respectively).

Comments

• The FOMC statement was dovish. Economic assessment was relatively downbeat with cautious stance on labour market conditions. Despite unchanged 2016 fed fund rate median forecast, 6 out of 10 FOMC voting members predicted only 1 hike this year.

• While external developments will have some bearing on future rate decision, we opine that changes in labour market dynamics are crucial in generating demand-led inflati on towards Fed’s 2% goal. Notwithstanding a furt her improvement in jobless rate to below long-run threshold of 4.8%, wage growth has not picked up signi ficantly to induce stronger consumer spending. Meanwhile, productivity growth has slackened given the persistent softness in fixed investment and ageing population.

• Given the hazy labour market outlook amid lingering external uncertainties, we now expect FOMC to have only one rate hike of 25bps in December.

• The further scaling back of FOMC rate hike plan would induce some short-term weakness in US$. However, recent developments in other major economies (i.e. Brexit risk, exceptional Yen strength, weaker -than-expected China growth) could lead to more monetary easing / stimulus, hence making US$ attractive again from growth / rate differential angle. In this regard, EM currencies, including MYR, may still experience weakening bias against US$.

• External factors aside, recent depreciation of MYR was also driven by domestic factors, i.e. lackluster appeal of MYR assets given corporate earnings disappointment and renewed governance issue (i.e. 1MDB). These domestic concerns coupled with a more gradual Fed rate hike may cause MYR to trade sideways in the near term. Consequently, we expect MYR to range RM4.00-4.20/US$ in 2H16 (previous forecast: RM3.80-4.00/US$).

Source: Hong Leong Investment Bank Research - 16 Jun 2016