News

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

• While the assessment of the US economy has improved overall, the Fed preferred to wait for further evidence of continued progress before raising rates. The FOMC said labour market has continued to strengthen and growth of economic activity has picked up. While inflation has run below thei r target, it is expected to rise gradually as transitory effects wane and labour market strengthens further. However, business spending remained soft.

• The FOMC said near-term risk to outlook now appears roughly balanced.

• Economic growth projections were tweaked lower for 2016 to 1.8% (Jul: +2.0%) but remained steady at 2.0% in 2017. Longer-run GDP growth was also cut to 1.8% (Jul: +2.0%).

• Projection of unemployment was raised to 4.8% for 2016 (Jul: 4.7%), matching long-run estimate.

• Forecast headline PCE deflator for 2016 was revised lower to 1.3% (previously: +1.4%) before raising to 1.9% in 2017.

• FOMC members’ projection of fed fund rate was reduced to 0.6% for 2016, 1.1% in 2017 and 1.9% in 2018 (previously: 0.9%, 1.6% and 2.4% respectively).

Comments

• The FOMC sounded relatively upbeat on the progress of the economy while also noted that downside risks now appear balanced. However, the FOMC decided to leave rates unchanged, consequently downgrading the median Fed fund rate forecasts to just one increase this year. Subsequently, 2017 and 2018 Fed fund rate forecasts were downgraded.

• There also appears to be growi ng dissent on t he F ed’s consensus view as 3/10 voting members voted against the action to leave rates unchanged. This is the largest number of dissent since December 2014.

• Hence, we maintain our forecast for the Fed to increase rates by 25bps in December 2016. As unemployment rate is close to the longer-run unemployment rate, further job gains in the labour market is expected to generate some demand-led inflation. In addition, the impact of earlier energy price declines is forecasted to fade, leading headline PCE to modestly increase.

• Notwithstanding the firmer probability of Dec hike, the less hawkish stance in 2017 is expected to cause some short - term weakness in US$. However, the continued easy monetary policies by other major central banks amid stillhigh downside risks (i.e. Brexit risk, rebalancing in China, commodity prices) would still make the US$ attractive from growth / rate di fferential angle. In this regard, EM currencies, including MYR, may still experience weakening bias against US$ towards the year-end.

• Apart from external factors, anticipation of Budget 2017 announcements on 21st October 2016 and a less dovish BNM are factors supporting ringgit strength. All-in-all, we maintain our MYR forecast range at RM4.00-4.20/US$ for remainder of 2016.

Source: Hong Leong Investment Bank Research - 22 Sep 2016