News

• The FOMC maintained its current 0.75-1.00% target range for the federal funds rate.

• The FOMC noted that while the economy has slowed, fundamentals remained supportive of continued growth. The committee indicated that the labour market has continued to strengthen even as economic activity slowed. Household spending rose modestly, but fundamentals underpinning the continued growth in consumption remained solid. Meanwhile, business investment firmed. The members noted that future indicators and surveys of inflation compensation remain unchanged.

• Economic growth projections were maintained at 2.1% for 2017; long-run: 1.8%

• Projection of unemployment remained unchanged at 4.5%; long run: 4.7%.

• Forecast of both headline and core PCE deflators for 2017 were at 1.9% respectively.

• FOMC members’ projection of fed fund rate was at 1.4% and 2.1% for 2017 and 2018 respectively.

Comments

• The FOMC statement was neutral. The Fed acknowledged that economic activity slowed in the first quarter, but attributed it primarily to temporary seasonal factors. This is in line with previous weak first quarter GDP print. Hence, while the Fed remains unperturbed on the recent slowdown, we see downside risk to FOMC GDP growth and rate hike projections if the weakness is carried forward into second quarter and beyond.

• Nevertheless, unemployment rate remained low and initial unemployment claims continued to average below pre recession levels. In addition, while some sentiment indicators have leveled off its recent peak (e.g. US PMI, NFIB Small Business Sentiment Index), they remained at strong levels indicating continued economic growth in post recession phase.

• As the US economy continued to grow, the Fed has changed its stance from supporting the recovery to sustaining the economic progress. By Fed’s estimates, the economy is already near full employment with growth averaging near its potential growth. In addition, risk aversion in external environment has tapered. Thus, we opine that the Fed would likely stay the course of a gradual rate hike this year (HLIB forecast: 25bps each in Jun and Dec 2017) to sustain the expansion, in line with Fed’s projection. While the USD is expected to rise temporarily around each rate hike, we do not think the strength will be sustained as we expect a more synchronized global growth and interest rate cycle to emerge in 2018.

• External factors aside, the recent appreciation of MYR was also driven by domestic factors, i.e. absence of major bond maturities in April-May 2017 and positive measures to support the onshore FX market. However, given the uncertainties in global market, we maintain our forecast for MYR to range RM4.30-4.55/US$ in 2017.

Source: Hong Leong Investment Bank Research - 4 May 2017