News

• The FOMC left its target range for the federal funds rate at 1.00-1.25%. The FOMC stuck to its projection for another rate rise in December and three further increases in 2018.

• The FOMC said that economic activity has been rising at a solid rate despite hurricane-related disruptions. Although hurricanes caused a drop in payroll employment in September, the unemployment declined further. Similar to the previous statement in September, the FOMC stated that household spending has been expanding at a moderate rate and growth in business investment continued to pick up.

• On inflation, gasoline prices rose in the aftermath of the hurricanes, boosting overall inflation in September. However, prices excluding food and energy remained soft. On an annual basis, the FOMC stated that inflation have declined this year and running below 2%.

• Economic growth projection was at 2.4% for 2017. In 2018, growth is expected to remain steady at 2.1%.

• Projection of unemployment was 4.3% in 2017, but is expected to be slightly lower at 4.1% in 2018.

• Forecast for 2017 core PCE deflator was projected at 1.5% in 2017 and anticipated to recover to 1.9% in 2018.

• FOMC members’ projection of fed fund rate was at 1.4% and 2.1% for 2017 and 2018 respectively, reinforcing the Committee’s decision to hike one more time in Dec-17.

Comments

• The FOMC decision was in line with expectations. The FOMC maintained its projection for another rate hike by the end of the year as they continued to sound upbeat on the progress of the economy. On 27 th Oct, the US Commerce Department announced that the economy grew by a robust 3% on an annualized basis in 3Q17, which was higher than the FOMC and economists’ projection of 2.5%. This is the first time in three years that growth in the US grew by 3% for two consecutive quarters, despite the Hurricane-related impact, underlying the strength in US economy.
• Nevertheless, the committee stated that inflation has declined this year. This is not a surprise as core PCE is at 1.6% on a year-to-date basis (2017: 1.8%). Going into next year, they project PCE inflation to recover closer to their medium-term target of 2%. In line with this, they see further gradual interest rate increase. Pricing in federal funds rate futures contract implied 85 percent probability of 25bps in December 2017.

• While the statement may continue to maintain the near term strength of US$, we opine that room for further US$ appreciation will be capped by a more synchronized global growth into 2018. We keep our ringgit forecast at RM4.10- 4.25/US$ for the remainder of 2017. Our view of a mild appreciation bias for ringgit is mainly supported by high export proceeds conversion riding on robust export growth. Meanwhile, foreign holdings in Malaysian equities and bonds have normalized in recent months, limiting abrupt selling and pressure on ringgit.

Source: Hong Leong Investment Bank Research - 2 Nov 2017