News

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

• Assessment of the US economy was broadly positive compared to the previous statement on 15 June. The FOMC said pace of labour market improvement has strengthened with stronger job gains. Economic activity expanded by moderate pace with consumer spending growing strongly but softness in investment remained.

• The FOMC said near-term economic risks have diminished.

• There was no revision in economic projections. To recap, 2016 and 2017 GDP growth forecasts were trimmed to 2.0% in the previous FOMC meeting.

• No new guidance was given on forecast of fed fund rate. In the previous meeting, FOMC members projected that fed fund rate would be at 0.9% for 2016. 6 out of 10 FOMC voting members predicted only 1 hike this year.

Comments

• The FOMC statement was slightly hawkish. Economic assessment has turned upbeat with resumption of improvement in the labour market conditions.

• After witnessing a swi ft recovery in global financial market post-Brexit kneejerk, FOMC is less concerned about impact of external developments on domestic growth momentum, leadi ng to the conclusion that “near -term economic risks have diminished”.

• We continue to opine that sustained improvement in labour market dynamics is crucial in generating demand-led inflati on towards Fed’s 2% goal. The persistent low unemployment rate (≤5% for 9 consecuti ve months ) and recent pick-up in job gains have led to a higher average hourly earnings growth (June: 2.6%). The improvement in labour market conditions, i f sustained, will induce stronger consumer spending and eventually lead to higher inflation expectations. On the flip side, productivity growth continues to slacken given the persistent softness in fixed investment and ageing population.

• Given the diminishing external risk amid resumption of labour market improvement, we maintain our forecast of one rate hike of 25bps by FOMC in December.

• We expect more strength in US$ as the path is again cleared for resumption of FOMC rate normalization. In addition, the looming monetary stimulus by BOJ and potentially more QE by the ECB towards later part of 2016 will make US$ attractive again from growth/rate di fferential angle. In this regard, EM currencies, including MYR, may still experience weakening bias against US$.

• MYR appreciated earlier this month driven mainly by fund inflows amid global search for yield after Brexit fear. However, the renewed governance issue (i.e. 1MDB) and RMB depreciation caused MYR to weaken again since mid-July. The resurgence of domestic concerns coupled with a clearer path for Fed rate hike may cause MYR to trade sideways in the near term. We maintain our MYR forecast range of RM4.00-4.20/US$ in 2H16.

Source: Hong Leong Investment Bank Research - 28 Jul 2016