american economy and interest rate

President Trump & Your Home Loan

What has the new 45th President of United States of America got to do with your home loan?  Well in making America great again, he will likely cause you to pay more interests.

Early signals from the financial markets seem to indicate that President-Elect Trump may succeed in rebuilding his country with Dow hitting new highs.  The historic win on 8 Nov is significant as the Republicans have a made a clean sweep of the White House, the Senate and the House of Representativies, allowing it to make sweeping reforms (though technically it still lacks the required 60 seats in Senate to pass new laws) in the next 2-4 years which is what Trump administration has promised during the campaign.

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Typically a Republican regime is good for businesses with lower taxes, a “smaller” government, and what is interesting is Trump administration’s promise of more infrastructural spending to revive an ailing economy that is growing too slowly.  Will that work?  With monetary policy alone seemingly unable to get the economic engine to roar again, most economists seem to agree fiscal measure is the right way to go, with the two fiscal and monetary to work hand in hand.  The question now is where is President Trump going to find the money to do all that when he promised sweeping tax reforms to cut taxes for both corporate America, small businesses and individuals?  From my perspective, there are only two ways – either issue more debt at record low interest rate now and tackle budget deficit issues in his next term, or increase other taxes like import tariffs.  Will he be crazy enough to carry out his threat of slapping a 45% tax on all Chinese imports leading to a trade war with China who is going to retaliate with the same with America exports to its domestic market?  Unlikely.

With fiscal measures, tax cuts that put more disposable income into the American buyer’s pocket, and massive funds inflow back to US equities and Treasury bills, the consensus now is that the dollar will strengthen and inflation is on its way up.  Already this has caused massive rebalancing by global fund managers over the last few days with yield curve steepening and bonds selldown gathering pace.

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Now I am not a political analyst and it is still unclear as to how interest would actually move in 2017 but we can now make better intelligent guesses than five months ago when Brexit happens.  Once again at MortgageWise, we will slowly start to stick our neck out and make some bold predictions on what is going to happen in 2017.  However do take our forecast with a pinch of salt as these are just our opinions based on how we read global events:

  • Dec 2016 rate hike is pretty much on the cards to us as the market did not crash after a shock election result, on the contrary it is now risk-on. Unless there is some major disappointment in jobs or labour market data leading up to Dec FOMC, we should see US Fed raise the federal funds rate by another 25 basis points.  Why so?  We think there are only two probable scenarios next year – first, fiscal spending indeed gets ramped up in 2017 with inflation shooting up quickly and the Fed needs to put a lid on it early; the alternate scenario is where you have trade wars, increased tariffs, and even a breakup of European Union leading to turmoils in financial markets and possibly a recession, by which time the Fed would have some leeway to roll back on its rate hike if it first increases it by another 25 basis points next month.  Either way both bolster the case for a rate hike in Dec which the market has already priced in and is expecting one.
  • The good news is we think after this upcoming rate hike, interest rates might remain level for a while. At this moment it is still unclear how the interest trajectory will look like in 2017.  The financial markets are now factoring in a quickened pace of rate hikes due to the expansionary policies of Trump administration.  However we prefer to take a more cautious view of things as economic growth can still be derailed by trade policies as well as the structural changes in demographics where the babyboomer generation just spends less over time.  We believe a lot of the growth in US has got to come from investments and corporate spending which will take a few quarters to take root.  And factoring in the various global risk factors in 2017 and slow winter months, we think the next rate hike will come only towards end of 2017.  At the maximum we put it at two rate hikes in 2017 both coming in the 2nd half of the year.
  • As capital flows back to US Treasuries and equities, dollar is likely to gain further strength which puts pressure on SIBOR here. We are expecting SIBOR to rise in tandem and in fact we expect the local banks to hike their DMRs (deposit mortgage rate) like FHR18, 36FDMR and 36FDPR with some even coming immediately within a month of US Fed’s move.  This is a sure-fire way for the 3 lenders to raise their NIM (net interest margin) as more of their mortgage loan books are now pegged to DMRs.  Raising NIM is necessary to shore up earnings against the backdrop of rising oil & gas provisions.
  • Oil price has always been a major consideration in our forecast and so far from what we read, no one can quite as yet make that call as to when the current glut will bottom out. Opec which controls 40% of the world’s supply is still unable to get their production cuts together.  We might now need to put more hope on the demand side for things to pick up in order for its eventual recovery to USD60-80 per barrel and to stay within that range.  That requires the biggest economies of the world like US, China & Europe to be firing again at a faster pace. No one knows when the world can get out of this deflationary environment but big fiscal spending by governments in developed countries from China’s OBOR (One Belt One Road) to US fiscal policy might prove to be the effective starting point, along with monetary tightening to mop up the slosh of liquidity of the past decade.  If that is accurate then we think two to three years sounds about right for this process to play out.
  • However first we need to get over the real risk of Brexit and that of a fracturing EU with general elections happening in five EU member states within the next 12 months including the two big leaders of France and Germany, along with Italy, Austria and the Netherlands. Will populist governments rise up leading to more financial chaos?  That, along with trade wars or protectionistic and nationalistic agendas, will form the biggest risks to global economic growth in 2017.

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Coming back to your home loan, what all that means is – do factor in a 0.25% increase in prevailing interest rates as we start off the year in 2017.  Our earlier call for homeowners to stay absolutely nimble still hold true – go for home loan packages with no lock-in as far as possible.  This is because you want to be the first few to jump into a fixed rate package the moment the pace of rate hike gathers.  And going by our latest forecast, we think that point would arrive somewhere from end of 2017 to early 2018.  You need two more rounds of rate hikes by US, and the more important one to watch out for is the one after next month.

Meanwhile StanChart’s 1% home loan with no lock (see below) remain our top choice, even after a Trump win, for all the reasons discussed thus far.  After all this is the last remaining package of its kind (1% interest in first year) as all the other banks have ended theirs last month.  Not to mention it comes with a low constant spread after the first year.  Incidentally we also believe StanChart will lag behind local banks in moving up their DMR (48FDR) but this is only our opinion.  As we have advocated you should really factor in a 25 basis point increase to your interest rate (for those on floating rates) sometime in 2017, so think 1.25% instead, which by the way is still lower than fixed rates today.

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*Note: Due to overwhelming response, a 2-year lock-in has been introduced with effect from 23 Nov 2016.  Find out how we get you a better overall deal in a MortgageWise Special when you apply through us.

A final caveat before we end – our interest rate forecast here will be so wrong should growth momentum picks up so strongly in US that cause inflation to run past 2.5% (the overshoot target) and US Fed is forced to hike rates aggressively by 25 basis points every quarter in 2017 leading to a full 1% increase!  That will certainly catch all of us by surprise but then again, never say never, in a crazy post-Brexit and Trump world where the conventions and the establishments are challenged.  New rules are being written and no knows what could happen next.  So brace yourself.  We could also be dead wrong here with our forecast.

If you are keen the last 1% home loan by StanChart, speak with our consultants today to find out more about a MortgageWise Special we have put together just for you, only from MortgageWise!

 

At MortgageWise, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into developments and news on mortgages & helping clients track interest rate movements.  We do not just go for one-time business with clients but rather choose to build long trusting relationships by giving truly independent advice to the extent of losing the deal.  We strive to become the first-choice mortgage partner for homeowners and the creditable distributor of mortgage products for banks and financial institutions in Singapore.

 

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About Darren Goh

Darren Goh is the Executive Director of MortgageWise.sg, a thought leader in the Singapore mortgage industry, with frequent interviews and quotes by the press - Business Times, Straits Times, Zaobao and EdgeProperty for his views on the latest mortgage trends. He is an avid property investor with careers in banking & real estate before becoming an entrepreneur.
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