The Federal Reserve governors left the Federal Funds Rate unchanged, albeit at a 22-year high, at the Federal Open Market Committee (FOMC) on Nov 1. Geopolitical tensions may have stayed the Fed’s hand, and that may weigh on equity markets in the short term.
“The increased macro uncertainty, and spiking geopolitical risks now facing markets means investors should be cautious on taking large outsized positions,” says JP Morgan Asset Management (JPMAM) in an update.
The decline in US treasury yields on Nov 1 is only partly due to the FOMC meeting. Ray Sharma-Ong, investment director, multi-asset solutions, at abrdn, says the US Treasury’s refunding announcement was smaller than expected and US domestic data showed that the ISM manufacturing index came in softer than anticipated.
Although the FOMC’s move was dovish, Sharma-Ong says “whether the Fed will pause in December depends on the persistence of the tightening in financial conditions. The current Fed dot plots indicate one more hike this year. If financial conditions reverse quickly, the Fed will proceed with a hike in December”.
Some market watchers — unsurprisingly — believe that the Fed has overtightened and that concern may be spreading. “Should financial conditions remain elevated, the current trend of moderating inflation, falling wage inflation, and reduced inflation expectations, are favourable conditions for the Fed to pause,” JPMAM says.
“We think that the Fed will get clarity on this as it becomes clear that the impact of higher rates is weighing on the activity of businesses and households and the labour market continues its slow normalisation. While the September dot plot suggested the median FOMC member was looking for another rate hike this year, Chair Powell noted that the usefulness of this as an indicator for the direction of rate fades given forecasts can change between meetings, meaning that the September dots shouldn’t be indicating a December rate hike,” JPMAM adds.
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The economists at UOB’s Global Economics and Market Research concur on the dovish outcome of the December FOMC meeting, an increasingly consensus view. “While [Fed chair] Powell tries to curb the markets’ “enthusiasm”, there looks to be a good case to argue that the higher Treasury yields, tighter financial and credit conditions are helping to do some of Fed’s work and reduces the need for the Fed to tighten monetary policy further, as long as the still elevated headline and core PCE continues to ease,” says Alvin Liew, senior economist, Global Economics and Market Research, UOB.
In addition to the Fed staying on “hold” in December, Liew expects rate cuts by mid-2024. “We price in 75 bps of rate cuts for 2024 (i.e. three 25-bps cuts, in June 20224, 3Q2024 and 4Q2024),” he says in his Nov 2 report.
JPMAM suggests that investors may prefer to stay neutral on equities rather than underweight, but with a preference for quality companies and those with the ability to protect margins. Fixed-income markets could be more appealing should yields on government bonds retreat as the market prices in peak FFR, JPMAM suggests sticking to investment-grade credit.
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Singapore’s small, illiquid but open markets are usually followers and price takers rather than price makers.
While the Straits Times Index (STI) has managed to hold above the psychological 3,000 level, a further conflagration in the Middle East, or turmoil in Russia, coupled with a slow but steady Chinese slowdown may unnerve local stocks. Therefore, the STI — and its components — may be somewhat stuck in their trading ranges. The STI resistance appears at the four-time tested 3,150 level.
The prospect of rate cuts in 2024 can only be positive for the bruised and battered S-REITs which have suffered notably this year. On the other hand, investors looking for yield may want to lock in some longer-duration T-bills just in case rates are near their peaks.
