SINGAPORE (Nov 4): On Oct 30, the US Federal Reserve announced its third interest rate cut this year, a move that was not unexpected.
The central bank’s Federal Open Market Committee lowered its benchmark funds rate by a quarter point, or 25 basis points, to a range of 1.5% to 1.75%.
Fed chairman Jerome Powell cited the US-China trade war and uncertainties associated with Brexit for dampening business sentiment. However, the US economy has thus far managed to remain “resilient”, according to him.
Powell said the rate cut was a “mid-cycle adjustment” in a maturing economic expansion, and that the central bank would not reduce rates further unless the economy slows down sharply.
According to him, “monetary policy is in a good place” and “likely to remain appropriate”. “There’s plenty of risk left but I’d have to say that the risks seem to have subsided,” he added.
Following the Fed’s rate cut, the Standard & Poor’s 500 closed at a record high on Oct 30. It gained 9.88 points, or 0.33%, to 3,046.77, breaking its record high twice in three days. Meanwhile, the Dow Jones Industrial Average increased 115.27 points to 27,186.69, while the Nasdaq Composite Index gained 27.13 points to 8,303.98.
“We expect the S&P 500 index to continue riding the recent wave of US-China optimism, barring any negative headlines,” says OCBC Treasury Research in an Oct 31 report. Eugene Leow and Ma Tie Ying of DBS Group Research are also rather optimistic on the rate cut.
“We still see 10-year US Treasury yields in the 1.5%-to-2.0% range for now. Worries about negative rates across the developing market space have receded somewhat as major central banks push back against overly low rates and overly flat curves. With the odds of a cyclical uplift improving and a likely end (or close to the end) of the monetary easing cycles in the developing market space, we see room for US yields to grind higher in the coming months. Ten-year yields could push above 2% in 2020,” they write in an Oct 31 report.
On the other hand, Thomas Costerg, senior US economist at Pictet Wealth Management, is not as positive on the recent rate cut. “As we fine-tune our 2020 macro scenario, we can say at this stage that the signals are not looking great,” he says.
He remains anxious that several issues will persist, such as the ongoing trade uncertainty, cracks in the US labour market such as slower wage growth and weaker hiring, the oil sector’s apparent adjustment phase again and the upcoming US elections.
“We do not think the Fed rate cuts this year will get much bang for their buck for US growth next year. The Fed overestimates the transmission of its looser policy to end-users, in particular to the US consumer.
We continue to fear that growth in consumer spending could slow further as the labour market could gradually lose steam,” says Costerg.
Kelvin Tay, regional chief investment officer at UBS Global Wealth Management, sees certain sectors, such as Singapore real estate investment trusts, benefiting from the lower rates. Year to date, S-REITs are up 20% and trading around 360 basis points above 10-year Singapore government bonds.
“Although valuations are rich, we do expect the sector to remain resilient, given the relatively easy monetary policy conditions globally,” says Tay.
The local property market is also expected to benefit from the lower rates. “With HDB prices holding up, lower interest rates are likely to improve affordability and, at the same time, ease the interest servicing burden on households,” notes Tay.
