OVERVIEW

● No surprises, Fed rate unchanged. The Federal Reserve’s Federal Open Market Committee (FOMC) decided on Thursday it is leaving short-term interest rates unchanged, keeping the target range of the fed funds rate at 2.00%- 2.25%. That’s the highest it’s been since the Great Recession a decade ago. The FOMC said it expects to continue gradually raising rates as the economy expands, noting that inflation remains tame.

● All eyes now turn to next month's meeting, which concludes on December 19. Immediately after the non-decision Thursday, Fed funds futures inched back slightly to show just under an 80% chance of rates moving up at least 25 basis points between now and the end of the year. If the Fed decides to hike again before 2019, it would be the fourth of the year, and the ninth since the Fed started raising rates from effectively zero in December 2015. Generally, the Fed’s decision and statement indicate that the economy remains healthy, putting the Fed in a perfect spot to raise rates next month. It still sees "further gradual increases" in the fed funds rate target range consistent with "sustained expansion of economic activity," translating to another hike due in December.

● The economy continues to fire on most cylinders, according to the Federal Open Market Committee (FOMC), though it did note that business investment has begun to moderate. Fed officials also upgraded their assessment of the economy, forecasting growth of 3.1% for the year. Statement notes that the labour market continues to strengthen and inflation remains near 2.0%, its target, with indicators of longer-term inflation expectations little changed. What’s really in question is how the Fed might proceed next year, especially in light of a U.S. economy that continues to charge forward even as many economies especially in the emerging markets look tepid.

● Malaysia interest rate outlook 2019. On the domestic front, whether the US Fed would raise rates in December and stick to its rate normalisation plan of at least three more rate hikes next year would have little effect on BNM’s policy decision for now. With inflation expected to remain benign in 2019 despite the elevated global oil prices and the floating of domestic fuel prices, and a slower economy next year, there is a likelihood that BNM would err on a rate cut. However, while the jury is still out there on whether growth would accelerate or moderate, we expect BNM monetary stance to lean towards pro-growth and price stability over the defence of currency. The Ministry of Finance is projecting GDP growth to slightly expand to 4.9% in 2019 (Kenanga: 4.7%) from a 4.8% forecast in 2018. For now, we foresee no changes in the BNM’s monetary stance for 2019 barring an unforeseen external shock.

● Downward pressure on Ringgit. The downward pressure on the Ringgit is expected to spill over till next year. However, with oil price trading slightly above USD70.0/bbl (Brent crude) and a positive current account balance, as well as ample liquidity, may continue to support the currency. Likewise, we have revised our USDMYR end of year forecast to RM4.15 from an earlier projection of RM4.05 due to uncertainty in the global economy and the prospect of a stronger USD. The USDMYR is likely to test the 4.20 level in the near term as it has been hovering between 4.16-4.18 over the past week.

Source: Kenanga Research - 9 Nov 2018