man in financial distress

V-shaped Recovery? Not For Interest Rate.

In fact, the hope of a V-shaped recovery with a quick rebound in one month or two is now dissipating.  From what I gather – the talk has now moved to that of whether it’s a U-shaped or L-shaped recovery.  Even President Trump has reluctantly admitted the virus crisis might only end in Summer by July/August.  He also conceded for the first time there is a real chance of US slipping into a recession with economy on shutdown mode.

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There is an eerie feeling that some things when talked about too much can come true.  Back in May last year, I talked about the theory in financial markets that a recession typically happens one year after the yield curve inverts (first happened on 22 March, 2019).  Some think it’s more like a year’s pause after the US Fed start to cut rates again (July 2019).  The exact timing is not the point here.  Whether you take that to be in March or July 2019, the market is bracing itself for some kind of black swan event to trigger a recession a year later – which means anytime this year.  Just that many thought it would likely be more of a tariffs-related trade war. Nobody would imagine it to be a war with virus which has caused a collapse in first supply (chain) and now global demand.

Airlines are the forefront of this demand collapse with some market analyst predicting that more than a few airlines globally would need government bailout, should the situation persist a few more months.  The question really is – how much longer.  Retailers and small businesses suffered massive drop in customer orders and should this drag longer, the thing that government fear most would happen – layoffs.  That would trigger a whole vicious spiral downwards in terms of economic activities. Airlines will ground planes and put staff on no pay leave.  Workers in hotels & leisure industry, F&B, Grab drivers, property agents would all be victims of the slowdown.  A ray of hope comes when we look to China’s containment measures which has seen it past the peak of the pandemic in just two months.  Still, all eyes are now on how fast China could get its economic engine to rev up again with a Q2 GDP contraction that is a foregone conclusion.

In anticipation of hard times, companies will cut costs and so do individuals. Thus, it’s timely to do a review on mortgage interests.  Let’s come back to the topic of what to expect next for interest rates.  At this point it seems global demand will need more than just a few months to come back.  And the effects of this economic slowdown globally might linger on till the end of the year.

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Even if we were all wrong and economy recovers in almost a V-shaped pattern by July, let me state categorically – it does not mean interest rates will rebound in a V-shaped as well.  If that were to happen, I’m very sure both the stock markets and global economy will crash once more – A-shaped.

The reasoning is very simple.  Just look at how long it took the US Fed to calibrate nine rounds of rate hikes in order to bring the target funds rate from near 0% to 2.50% – three full years from Dec 2015 to Dec 2018!  The central bank could only go up by 25 basis points every quarter for fear of crashing the market pre-maturely.  And they can’t do it consecutively every quarter without checking and deliberating carefully on incoming economic data.  When it comes to the reverse or rate cuts – that’s easy for the Fed.  We’ve just seen how the Fed executed 0.75% cuts in almost three consecutive months last year (July to October).  Followed by an emergency cut of 0.50% on a Sunday two weeks ago (3 Mar 2020).  And the latest “throwing the kitchen sink” cut of a full one percentage point from 1.25% back to near 0%, topped up with Quantitative Easing (QE)!

The point is – it’s easy for the Fed to cut rates in a jiffy but to put back those cuts later is going to take time even when the Covid-19 crisis is over. Perhaps even much longer this time round than the three years needed for a 2.50% increase.  We may not even get that far considering how the prospect of a recession is now looming after a super bull cycle of 12 years from 2009.

Let’s take a look at the path of Fed funds rate.  Back in May 2019, we presented 3 interest rate trajectories (reproduced in chart 2 below) for the fed funds rate, in a bid to allay clients’ fear that the scenario of a “runaway interest rate” environment (Trajectory 1) looks highly unlikely even on the chart.  True enough with the benefit of hindsight (chart 1), we see that Trajectory 3 has indeed come true with a steep plunge in fed funds rate since then. SIBOR quite expectedly followed suit.

correlation between singapore and us interest rates
Our 3 Interest Rate Trajectories Presented In May 2019

So, what can we expect from here.  Again, let’s go back to the chart and learn from historical patterns.  3-month SIBOR is holding at 0.99083% (as at 19-Mar) but we think it’s likely to soon fall to 0.50-0.70% range based on that close correlation between the two indices.

How it will move from there is harder to predict.  We could go into another prolonged slump in interest rates similar to the one after the 2008 financial crisis (from 2009 to 2014).  Or we could also do a U-shaped recovery in interest rates like back in the SARs period of 2003-2004.  I tend to think that it’s more likely to be an L-shaped recovery for interest rates where it will take quite some time for it to come back up.

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Speaking of trimming costs, we talked about locking down a potential 1% home loan in our last article.  That small window of opportunity has now closed as the last bank to adjust spreads up just did that today.  Count yourself lucky if you have heeded our advice earlier and can now sit back to watch how your home loan interests fall to 1% soon and stay there for coniderable time. For the rest of you reading this – please do not miss this again.  You still have one last chance to enjoy perhaps a 1.20% home loan but only if you act now! Speak to us today.  

1.20% home loan?  You can still laugh all the way to the bank with that.  We think banks will continue to adjust their spreads up when SIBOR falls in order to protect their NIM (net interest margin).  Eventually everyone will just be at 1.40-1.50%.  Mark our word.  You want to take action before that happens.

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, seeking to build trust with clients over the longer term rather than product-peddling for quick one-time deals.  So, be it to refinance home loan, or to buy your next Singapore property, speak to our dedicated team of mortgage consultants here for the best home loan rates.

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