US Federal Reserve FOMC

Rate Hike 2016 And Our Prediction

I am currently in the US as I writing this article and all over news channel daily now is the heated debate between Democrats and now presidential candidate elect of Republicans – Mr Donald Trump. As at last evening he has won over enough delegates to be formally installed as the Republican candidate for GOP and that fight between Hillary and Trump in November is no longer just talk but real.

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I sense on the ground there seems to be great distrust in Secretary Hillary Clinton which explains why there is growing popularity for the straight-talking but provocative Mr Trump over the months. He talks about making America great again, and if he does trumped over his competitor in the election all eyes will be on how his business approach to the running of the country will bring about substantial change and more jobs for Americans. There are uncertainties abound especially in terms of his protectionistic stance towards global trade. Will the US economic recovery pick up pace in 2017 or will it be derailed? The outlook is becoming more cloudy, add to that the possibility of a Brexit in a 23 June UK referendum just a week after US Fed FOMC meeting now scheduled for 14-15 June.

I always revel in the opportunity to do this forecast unlike other mortgage comparison sites that usually sit on the fence; we prefer to take a stance in making our calculated recommendations. That’s part of our value add. Let me be clear first, no one has all the answers. Right about this time last year we predicted Fed will hike rates and fixed rates will all be above 2% p.a. by July 2015 but that did not happen. What did happen instead which took everyone by surprise was the sudden devaluation of the Chinese yuan leading to a stock market stock retracement in bourses all over the world as the slow down in Chinese economic growth took centrestage.

Janet Yellen has just spoken in a Harvard speech that it will be appropriate for Fed to hike rates in the coming months if data continue to show improvements in labour markets. We interpret that to mean rate hike will not happen in June, but likely in Q3. At the start of the year we predicted 2 rounds of rate hikes this year of 0.25% each (or 0.50% for the full year) when the market takes its cue from US Fed’s very own forecast in December when it made its 1st historical rate hike in almost a decase, that of 4 rounds of rate hikes of 0.25% or 1% for the full year. However based on what I observe in US in this trip (less than steller corporate results reporting and some retrenchments happening in the Wall Street) and all the political uncertainties I have highlighted above, and the fact that oil prices is now stabilizing at a higher level much earlier than expected which in my view is a negative for economic growth, I will moderate our forecast somewhat to that of 1-2 rounds of rate hikes this year. We think Fed will move only in Q3 and likely in September’s FOMC. There may still be a 2nd round in Dec but that is quite hard to forecast at this moment not until after the GOP. Overall the uptrend in rates is intact, just at a very gradual pace.

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However the real question to ask – is the market going to factor in a rate hike as always in the run-up to June’s FOMC, leading to the strengthening of USD which is already happening even as I am writing this. This will once again put upward pressure on SIBOR. That is hard to say but I do think there will be some movements in the coming weeks.

Though we pare down our hawkish view somewhat, we still maintain that the 3 local banks will move at least one time on their deposit rates whether the US Fed hike rates once or twice this year. This means that those on mortgages pegged to DMR (Deposit Mortgage Rate), specifically DBS’s FHR18, OCBC’s 36FDMR, or UOB’s FDPR, do expect a 0.20 to 0.25 percentage point increase on their rates this year sometime in Q3. We also maintain our general recommendation that those with bigger loans should just opt for fixed rates of longer tenures, which at this moment still languish at sub-2%. In fact with the upward trajectory on interest rate still intact, and we think that will take at least another 4 years to reach the peak (we take 2016 to be 1st year of the current cycle) it takes a few brave man to bite the bullet and go for 4 year fixed rate at slightly over 2% but they will likely have the last laugh. We have not renegaded from this position.

To end off remember this, just a single round of rate hike in Q3 will bring SIBOR up by 0.25% back to 1.25% and level off with prevailing fixed rates even on packages with the lowest 1st year spread of 0.65%. And we think SIBOR will end the year at the range of 1.50%! Let’s see if we get this right this time.

At MortgageWise, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into market developments & helping clients track interest rate movements.  Make a difference to the way you plan your mortgage today by consulting with a professional whose insights, experience and independent advice you could benenfit from, instead of going directly to the banks for their “standalone” views. We strive to become your first-choice mortgage partner and the creditable distributor of mortgage products for lenders 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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