● As expected, the Federal Open Market Committee (FOMC) unanimously left its benchmark interest rate unchanged at a target range of 1.50-1.75%. It indicated that it will continue its short-term repo operations through April and would closely monitor on the new coronavirus or nCoV outbreak in China.

● Fundamentals unchanged. In its statement, the committee’s description of the economy remains unchanged since its last meeting, citing “that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labour market conditions, and inflation returning to the Committee's symmetric 2% objective."

● New threats. While the Fed continues to expect economic growth to continue, it is cognisant of possible new threats emerging. Fed Chairman Jerome Powell said at his post-monetary policy decision press conference that though he observed that some uncertainties, chiefly regarding trade tensions, have diminished, others have emerged, "including those posed by the new coronavirus."

● Extends repo till April and signals hold for some time. The Fed gave no clear signal as to the direction of the next rate adjustment. Powell suggested the FOMC is likely to remain on hold for quite some time assuming little changes in current trends. Meanwhile, the Fed said it would keep lending to the short-term money market via short-term repo operations through April. Previously, it said the program would last through mid-February. The monthly purchases of Tbills will also last through April. Some market observers have likened the current balance sheet policy with “QE” or quantitative easing. A hike from the current level is unlikely unless and until the 10 year yield is above 2.0% for a sustained period, given that the Fed doesn’t want an inverted yield. This supports our view that any rate adjustments by the Fed, which is likely to lean towards cutting, would probably start after the 1H20.

● BNM has room for another cut. We view the Bank Negara Malaysia’s recent 25-basis point rate cut (22nd Jan) as a pre-emptive measure to deal with the uncertainty of the impact of the trade war and to a certain extent implicitly to deal with the possible impact of the nCoV. As the uncertainty on both fronts as well as the multiple geopolitical risk remains and could limit any potential upside to growth, we believe that BNM still has room for another 25bps rate cut. This may likely happen in the 1H20.

Source: Kenanga Research - 30 Jan 2020