First, let me wish all readers of this blog a Happy New Year in 2019!
A food-for-thought to share as we begin a new year: If a lifetime is defined as 70 years long, and 10 years is equivalent to a single day in a week, which day are you at in 2019? My guess is for most of us reading this blog, it would be on a Thursday (30s) or Friday (40s) – well then weekend’s just round the corner and let’s make it a smashing good one and make it count! All the best.
Lowest Fixed 3.15% (Min $500k)
Interest rate forecast is a tricky business and most would rather not stick their neck out for it but here at MortgageWise we do this at the start of every year. We are not perfect but I think we have been close in our call in the last two years. At start of 2017 we forecasted 3-month SIBOR to end at 1.50% but revised this down later (we review forecast every 6 months) to a range of between 1.25-1.30%. SIBOR did make a dash of 25 basis points in last 4 days of 2017 to cross 1.50% in the end. We did however correctly forecast three rate hikes by Federal Reserve in the year. At the start of 2018 last year, I think we were the most aggressive in the market with our forecast for SIBOR to cross 2% by end of the year (from what I was reading at that time, the most bullish forecast from bank analysts was for 3-month SIBOR to hit 1.70%). We didn’t get it exactly right this time but we were close – 3-month SIBOR ended 2018 at 1.886% (as at 31 Dec 2018). 1-month SIBOR also ended at a high of 1.76342%. We overshot in our forecast as the gap (we notice) between 3-month SIBOR and the Fed funds rate has widened to roughly 50 basis points or 0.50%. See the correlation chart below. We were however right in our prediction that wage inflation will pick up strongly in US in 2018 which might play a part in Fed revising from three hikes to four in 2018, even though the link between wage and price inflation has been weakening.
What now for 2019? I must say this is going to be the most difficult forecast to make in recent years no thanks to the trade war between US and China in which the effect is slowly being felt in the global economy from 2019 onwards. No one can predict for sure what is going to happen while the stock market, being a precursor to the real economy, has signaled volatility ahead. The US Fed has revised its forecast from three hikes this year down to two in its Dec FOMC (Federal Open Market Committee) while maintaining US economy stays solid for now, borne out by the payroll numbers just released of 312,000 new jobs added in the month of December. Still there is a great fear that either a slowing China culminating in an economic meltdown or a US Fed that go too “fast” in hiking rates (blasted by Trump) would trigger the next global recession sooner than expected. No one knows. In the midst of all the “noise”, I can only draw on two factors as basis for our forecast:
Lowest Fixed 3.15% (Min $500k)
1. The Stakes Are Too High On Both Sides
Though hard, I believe there will be some kind of deal by US-China by the deadline of 1 March 2019, or in due course sometime in the year. The stakes are simply too high for leaders on both sides politically not to strike a deal. So, I am betting that such a deal will materialize and be cheered by the market and get the global economy back on the growth path once more.
Two other impetus will help to keep the global growth intact, albeit slower than expected. China will pull out all stops to keep its economic engine revving along through massive fiscal stimulus with its huge reserves like what it did back in 2008. You can bet on that when needed. As for the US, even as President Trump wrestles with a divided Congress where the Senate is controlled by the Republicans and the House by the Democrats, it is likely they would still pass the last of his campaign promise which is bi-partisan – a big infrastructural stimulus plan to rebuild America’s roads, bridges, airports, etc.
Overall, I do not see a global recession as yet in 2019 as there is political will on both sides of the Pacific to boost their domestic economy and get their GDP growth going again. The current turmoil in financial markets will pass.
2. Twin-Effect of Monetary Tightening
I also believe the Fed will become more mindful to its actions on the balance sheet, or QT (Quantitative Tightening), where it is selling Treasuries and mortgage-backed securities to the tune of US$50b per month now into its 2ndyear (started in Oct 2017). This has the effect of “mopping up” money supply and liquidity in the system and is a form of tightening or “increasing interest rates” at the longer end of the curve, ie. 10-year & 30-year Treasuries. The Fed targets to unwind about half of its positions of US$4.5t of securities accumulated during its three rounds of QE actions in the last financial crisis. Initiallty the Fed chair Jerome Powell has erred in dismissing the idea that the bond sale programme could be tweaked and held it up to be on an “auto-pilot”. That roiled financial markets and the Fed has since been forced into admitting that the QT programme is not cast in stone and is open to making any changes needed should the data shows that US growth is deteriorating at some point.
What this means is that going forward in FOMC meetings from 2019, Fed will likely err on the side of caution not to over-hike at the short end of the curve (fed funds rate) if they would like to keep the pace of QT programme intact.
Lowest Fixed 3.15% (Min $500k)
After giving the two factors that underpin our forecast, this is what we think will happen in 2019: US Fed will indeed, like it said, hike twice in 2019 especially if growth gets back on track and we would see US Fed funds rate go near to 2.75-3.0% range by end of 2019. In fact, the good news is I believe this is likely near the end cycle for interest rate and going beyond 2019 it is quite hard to imagine Fed hiking above 3% for two reasons. First, as explained there is double-effect of monetary tightening both at the short and long end of the curve at the same time due to the unprecedented measures taken in the last crisis; which means the Fed need not go all the way to 4-5% in hiking short-term rates unlike in past cycles. Second, I suspect that the longer-run “neutral rate”, where the Central bank is neither accommodating or restricting growth, has now been brought down to a much lower level with technological advances causing inflation not to show up quickly. This has been the theme in the last few years and for as long as inflation stays muted, the Fed will be criticised for hiking too much.
What this means then for Singapore interest rate is that by end of 2019, 3-month SIBOR would go close to 2.3% while 1-month SIBOR would hover in the range of 2.1-2.2%. Still it would take six months to get there provided we get all our predictions above correct. We would have to revisit this forecast again in June. Meanwhile SIBOR would most likely trade sideways at the current levels of between 1.8-2.0% for a short period of time at least in the 1st half of 2019.
In 2019 most homeowners in Singapore, except for those on fixed rates, would be paying close to 2.2-2.3% as we are expecting a few more banks to announce rate hikes in the next few months. Those with lock-ins expiring within the next 6 months could contact us for a quick review of their home loan interest before they decide whether to reprice or refinance home loan.
Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest developments in the industry, providing useful mortgage tips, and making sense of rate movements. We seek to build trust with clients over the longer term instead of doing product-peddling for quick one-time deals. That’s why we always present “whole-of-market” perspective including home loan packages that some banks do not pay us.