In line with our expectation last month, US Fed has just announced a quarter percentage cut to its Fed funds rate to bring it down to within a range of 2% to 2.25%. But this was much smaller than what the market has expected (a cut of 0.50%) and hence leading to a slight sell-off on Wall Street.
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We have argued last month that this really amounts to an insurance cut in a bid to extend a 10-year old bull market and this is exactly what Fed Chair Jerome Powell said: “I see the US outlook as being a positive one. The downside risks are really coming from abroad.”
Indeed, the US economy is still holding up well with GDP for first half of the year averaging 2.6% growth, unemployment at 3.7%, 224,000 jobs added in month of June (average monthly of 172,000 this year), and with Fed’s preferred measure of inflation that strips out volatile food and energy prices staying stubbornly low at 1.6% (below Fed’s target of 2%). The real threats are coming from abroad with US exports slowing down and business sentiments and investments in US dampened by trade war tensions as companies pulled back.
Whether this marks the start of a full interest rate cycle reversal (which Fed does not think so at this point) or just a blip depends a lot on the outcome of trade talks now resumed between the two global economic powerhouses; the outcome which is something hard to predict but we remain fairly optimistic that there will be some kind of a deal at some point.
This latest cut – the first in 3½ years since US Fed first started hiking rates back in Dec 2015 – has further vindicated our view at the start of the 2019 when we started recommending going back to SIBOR-based floating rate home loans and some clients were puzzled. They asked why are we not proposing fixed rates (as offered and recommended by their repricing banks) against a backdrop of escalating rate hikes by more and more lenders in Singapore where most seen their mortgage interest increased by average of 0.60% in a short span of 4-6 months. Our view is that this pace of 9 rate hikes over 3 years by US Fed is unlikely to be sustainable with trade tensions already brewing in the horizon. And indeed, US Fed has been forced to make a U-turn in March FOMC by tapering down on hike expectations from two to zero for 2019, to now a rate cut on the contrary!
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We are likely to see more downward pressure on SIBOR in the coming weeks and months as a result of the latest rate cut and the general dovish and accommodative interest rate environment globally. There is also the liquidity excess stemming from weaker economic activities in Singapore which is now coming to the fore after months of contraction in global manufacturing demand.
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