SINGAPORE (Oct 31): Just a day before Halloween, the US Federal Reserve spooked the market with its third interest rate cut in a row this year.
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 Brexit uncertainty for dampening business sentiments. However, the US economy has thus far managed to remain “resilient”.
Powell said that this rate cut is a “midcycle adjustment” in a maturing economic expansion, and that it would not reduce rates further unless the economy slows down sharply.
He opined that “monetary policy is in a good place” and the “current stance of policy as likely to remain appropriate” as “there’s plenty of risk left but I’d have to say that the risks seem to have subsided”.
This was in turn interpreted by market players as a “hawkish cut” signalling a pause in further rate cuts.
“We would need to see a really significant move up in inflation that’s persistent before we would consider raising rates to address inflation concerns,” he added.
Following the announcement, the S&P 500closed at a record on Oct 30. It gained 9.88 points or 0.33% to 3,046.77, scoring its second record in three days. Meanwhile, the Dow Jones Industrial Average increased by 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,” said OCBC Treasury Research in an Oct 31 report. Eugene Leow and Ma Tie Ying of DBS Group Research are keeping rather dovish on the rate cut situation.
“We still see 10-year US Treasury yields in the 1.5-2.0% range for now. Worries about negative rates across the developing market space has 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. 10Y yields could push above 2% in 2020,” added Leow and Ma in their 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 said.
He remains anxious that several issues will persist, such as the ongoing trade uncertainty, cracks in the US labour market, the oil sector seemingly in an 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,” added Costerg.
Kelvin Tay, Regional CIO, UBS Global Wealth Management, sees certain sectors, such as Reits, Singapore benefiting from the lower rates. Year to date, Singapore Reits are up 20% and currently trading at around 360 bps above 10-year Singapore government bonds, which is the highest globally.
“Although valuations are rich, we do expect the sector to remain resilient, given the relatively easy monetary policy conditions globally,” he says.
The Singapore property market is also seen to benefit from the lower rates. “With HDB prices holding up, lower interest rates will likely improve affordability and at the same time ease the interest servicing burden on households,” says Tay.
