Global Economics & Market Strategy

Economics Weekly View: Whispers of FFR Hike Can be Heard

10 May 2024
 

Barnabas Gan Acting Group Chief Economist & Head, Market Research

• We are one month away from 11 – 12 June's US FOMC meeting, where the committee members are expected to release economic projections and a revised dot-plot chart. What we are hearing from the Fedspeak may be disconcerting to dovish-tinted investors, whereby official rhetoric has recently been mentioned potential FFR hikes should inflation stay elevated. According to Minneapolis Fed Chair Neel Kashkari, "We need (rates) to go higher… (should) inflation be embedded or entrenched at 3.0%". Other members, including Boston Fed Chair Susan Collins & San Francisco Fed Chair Mary Daly, commented that "more time (needed)" to return inflation to the central bank's 2.0% goal, with the latter adding that the US economy is normalising but is far from weak. The sudden visit to rate hike possibilities and louder calls for the FFR to stay unchanged could mean a material shift in the upcoming FOMC dot plot. 
   
• Our view for only one FFR cut by end-year remains unchanged, with the balance of risks magnified towards no rate cuts. We think that market pricing return to two rate cuts is too myopic and likely to be repriced back to one-to-zero rate cuts by the end of the year when the market realises that global inflation is here to stay. Energy prices may trend higher despite the recent decline in crude oil prices – Brent is currently trading around US$85 per barrel on falling risk premiums. Still, we expect (1) continued global economic recovery and (2) extended OPEC+ supply to linger and bring Brent crude price back to US$90 per barrel in 2H24. We continue to see evidence of higher food and base metal prices, poor weather conditions and a rosier China-centric economic environment to support key commodity prices. Our US inflation model suggests the risk of core PCE inflation to stay entrenched around the 3.0% handle in 2H24, and in the words of Kashkari, suggesting that rate hikes may not be impossible should core PCE momentum stay elevated at >0.3% MoM (see Figure 27).
   
• The implications to our view are as follows: First, we continue to see upside risks for DXY to move towards 110 in 2Q24, assuming that FFR cuts continue to be priced out and recent labour weakness is a blip. The DXY momentum has turned flat this week as US-centric indicators were of mixed signals (high US inflation but a relatively weaker labour market) on how rates may move. For short-term movements, we think the DXY will likely range trade between 104.8 and 106.2 in the coming week, with technical indicators for DXY lacking key turning signals such as Bollinger band, RSI and MACD. Second, market pricing out of FFR cuts into 2Q24 should mean that the decline of US10Y yields below 4.5% is temporal, with the recent fall also likely a function of lower risk premiums. We forecast US 10Y yields to rally back above 4.5% and potentially move higher towards 4.8% in 2Q24. Third, a stronger DXY into 2Q24 should mean a generally softer ASEAN FX spectrum, where we think MYR may move higher back to its 4.8 per USD handle. Our caveats to our forecasts have been discussed in our prior weekly report, specifically (1) lower-than-expected global inflation, (2) unexpected deterioration of US labour conditions and (3) unanticipated uptick in exogenous risks such as geopolitical tensions.
   
• Closer to home, we keep our forecast for Malaysia's policy rate at 3.0% for the year. We see no reason for Bank Negara Malaysia (BNM) to tweak its rate this year on the back of a rosier GDP backdrop of 4.6%, tame headline inflation of 3.3%, and a relatively stable MYR quarter-to-date. (report)
   

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