The US Federal Reserve’s minutes from the July Federal Open Market Committee (FOMC) meeting will notably be scrutinised next week (August 14-18), notes S&P Global Market Intelligence. July’s US PMI data revealed continued but slower growth for services while manufacturing output expanded marginally. The 10-year yield on US treasuries did not act in a positive manner and remains comfortably above 4%.
The latest S&P Global Investment Manager Index survey showed that concerns over valuation heightened in August among US equity investors. “This stemmed from both an elevated US market valuation and worries over the outlook amid lingering central bank policy and macroeconomic risks,” S&P Global Intelligence says. “Next week’s releases will therefore provide further insights as to whether these equity market woes deserve greater attention or otherwise.”
RHB’s research believes that the Fed isn’t done with its rate hikes and hence market volatility may not have come to an end. RHB says its “top down views on global economics and inflation are that we believe risks are rising and US Treasury 10-year bond yields could hit 4.5%-5.0% by end-2023 versus our current baseline forecast of around 4.4%”.
Neither does RHB think that inflation will get to 2% in 1H2024 either. “We maintain our peak US Federal Reserve Bank (FED) Federal Funds Rate (FFR) forecast of 5.50%-5.75% with the balance of risks tilted towards a print of 5.75-6.00% in 2023. We continue to expect no FFR cuts in 2023 and 1H2024,” RHB emphasises.
“We are not believers in the medium-term “Goldilocks” scenario that some market participants are contemplating currently.” it adds.
The 10 year yield on US treasuries has a direct bearing on equity markets because it determines the weighted average cost of capital of stocks. As at Aug 11, the yield on 10 year yield is at 4.086% and has room to rise. By the same token, equity markets - especially in APAC where they are price takers - are likely to prolong their corrective phase.
See also: STI’s upside from breakout remains valid as risk-free rates fade, but stay watchful for FOMC
The Straits Times Index barely moved week-on-week, ending at 3,294 on Aug 11, up 2 points week-on-week. However, the STI rose to a high of 3,322 - attained on Aug 10 - before forming a black candle causing a dark cloud cover over the preceeding white candle days. Support says at 3,230, near the confluence of the 50-, 100- and 200-day moving averages at 3,238.
Despite RHB’s negativity surrounding the yield curve, it expects that US and global growth “have already bottomed out and the start of the recovery process has commenced”. Now if only that is true of the equity markets.
