News

• The FOMC voted unanimously to raise the target range for the federal funds rate by 25bps to 0.50-0.75%.

• Assessment of the US economy was more upbeat. The FOMC said the labour market continued to strengthen and overall economic activity has been expanding at a moderate pace. Consumer spending has been rising moderately but softness in investment remained.

• Market-based measures of inflation compensation moved up considerably but are still low while most survey-based measures of longer-term inflation expectations are little changed.

• After downgrading projections steadily in previous meetings, forecasts in the near-term were tweaked slightly higher while long-run projections were unchanged. 2016 and 2017 GDP growth forecasts were higher at 1.9% and 2.1% (Sep: 1.8% and 2.0% respectively).

• Projection on unemployment was tweaked slightly lower for 2016 and 2017 (4.7% and 4.5% respectively; Sep: 4.8% and 4.6% respectively).

• Estimates of headline PCE deflator for 2016 was revised higher to 1.5% (previously: +1.3%) while 2017 was unchanged at 1.8%. Core inflation remains unchanged.

• Consequently, FOMC members’ projection of fed fund rate was raised by an additional 25bps for 2017 till 2019 (2017: 1.4%; Sep: 1.1%; 2018: 2.1%; Sep: 1.9%; 2019: 2.9%; Sep: 2.6%).

Comments

• The FOMC statement was less dovish as the Fed expects slightly faster economic growth and headline inflation, leading it to raise its interest rate forecast gradually. However, the Fed also noted that the risk appeared ‘roughly balanced’ and emphasized that future moves will be data-dependent.

• Notwithstanding the improvement in most economic data and expectations of sizeable fiscal stimulus under the new President-elect, we opine that optimism will moderate in early 2017 due to i) winter season leading to slower economic activities ii) higher interest rates presaging lower housing affordability iii) strong USD weighing on corporates’ profitability. Meanwhile, productivity growth continued to moderate as businesses have yet to increase capital spending while ageing population remains an issue.

• Given the moderate increase in growth projections amid external uncertainties, we maintain our expectations for FOMC to have two rate hikes in 2017.

• The FOMC’s projection of slightly faster pace in its rate hike plan would induce strengthening bias in US$. In this regard, EM currencies, including MYR, may still experience weakening bias against US$. However, this is expected to be partly mitigated by Bank Negara Malaysia’s recent moves to improve the stability of the MYR. Consequently, we maintain our forecast for MYR to trade in range-bound of RM4.20-4.50/US$ towards the end-2016 and 4.10-4.40 in 2017.

Source: Hong Leong Investment Bank Research - 15 Dec 2016