A fall in bond yields provides relief for stocks

Date: November 7, 2023

  • As expected, the US Federal Reserve kept interest rates unchanged
  • Despite Fed’s message of “higher for longer’’, US Treasury bond yields fell, the 10-year yield down from 4.9% to 4.557%
  • Benign US jobs report suggests Fed may hold rates unchanged at next FOMC
  • Probability of no rate hike at 13 Dec FOMC is at 95%
  • Wall St stocks rallied, taking the STI up 82 points or 2.7% to 3,143.66
  • MAS imposed curbs on DBS after spate of digital service breakdowns
  • Singapore’s factory output grew in Oct but electronics decline continued


No surprises as the Fed kept rates unchanged

The week’s pivotal event took place on Wednesday with the latest US Federal Open Markets Committee (FOMC) meeting.

As with most past meetings, there were no real surprises – the Fed left interest rates unchanged, marking the second meeting in a row where the central bank has skipped a hike in its current policy-tightening cycle.

The outcome, which was unanimous and had been widely expected, keeps the target for the federal-funds rate at 5.25-5.50%.

Thanks to a rally in US stocks and bonds, the Straits Times Index added 82 points or 2.7% at 3,143.66. Volume however, was low , averaging just S$928m per day.

Most of the gains came on Friday, when the STI jumped 61 points or about 2%. The bulk of this came from the banks led by UOB, which had dropped S$0.21 on Thursday, but bounced S$0.78 pr almost 3% to S$27.71 on volume of 3.3m on Friday.

Fed’s statement suggested “higher for longer’’ still remains

However, the FOMC’s statement said the “Committee is strongly committed to returning inflation to its 2 percent objective’’, whilst at a press conference, Chair Jerome Powell said that officials weren’t yet satisfied with the progress being made on inflation and that monetary policy might not be restrictive enough.

He also said policy makers are also watching rising bond yields, which have also contributed to tighter financial conditions.

“Inflation has moderated since the middle of last year and readings over the summer were quite favourable. But a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal,” Powell said.

Wall Street stocks and bonds rallied, 10-year yield dropped sharply

US stocks rose after the FOMC meeting, mainly because bond yields backed down from their recent highs. On Wednesday, the 10-year Treasury, which last month crossed 5% for the first time since 2007, closed at 4.733%.

Stocks had their best week of the year after Friday’s jobs report came in cooler than expected, sending the 10-year Treasury yield lower.

The U.S. economy created 150,000 jobs in October, the Labor Department reported on Friday, marking a larger-than-expected slowdown from September amid auto strikes and moderation in the leisure and hospitality sector.

The report should give the Federal Reserve more flexibility to hold interest rates steady next month.

The 10-year Treasury yield fell 0.289 percentage point to 4.557% this week after soaring north of 5% last month. The 30-year yield fell to 4.75%, marking its largest one-week decline since March 6, 2020.

MAS imposed curbs on DBS after spate of digital service breakdowns

The Monetary Authority of Singapore (MAS) on Wednesday said it has imposed a “six month pause’’ on DBS, during which the bank will have to suspend non-essential changes to its IT systems and will not be allowed to take on new business ventures.

During this period, only IT system changes related to security, regulatory compliance and risk management will be allowed, said MAS.

“This is to ensure that the bank dedicates the needed resources and attention to strengthen its technology risk management systems and controls,” it said. DBS will also not be allowed to reduce the number of its branches and automated teller machines (ATMs).

The DBS Board and Management today apologised for the series of digital disruptions this year, and said the bank is addressing the issues at hand with utmost priority. Apart from breakdowns on 14 and 20 Oct, there were also disruptions on 29 March, 5 May and 26 Sep.

On Thursday when the STI rose 5.72 points to 3,082.49, DBS’s shares sank S$0.37 or 1.12% to S$32.66 on volume of 3.3m. However, they rebounded S$0.63 or 1.93% on Friday to S$33.29 with 3.6m traded.

Singapore’s factory output grew in Oct but electronics decline continued

Singapore’s purchasing managers’ index (PMI) edged up to 50.2 in October, a 0.1 point gain from the previous month. A reading above 50 on the index indicates growth from the previous month, while one below 50 points to a contraction.

However, the electronics sector contracted for the 15th consecutive month in October, though at a slower rate than the month before. The sector gained 0.1 point to 49.9 in October.

Private-sector economists cautioned that the manufacturing sector’s recovery is still uncertain, given that the electronics sector’s turnaround has yet to stabilise.

The Business Times quoted UOB associate economist Jester Koh “While we are heartened by the broad-based improvement in October’s overall PMI, we caution that the manufacturing sector could remain downbeat in the near term – likely for the rest of 2023 and into early 2024 – given the weak external demand’’.

 “The sub-50 reading for electronics PMI reaffirms the assessment that the electronics sector is likely to remain lacklustre in the near term.”

The improving trend of Singapore’s overall manufacturing PMI over the past few months is a “nascent sign” that a gradual yet fragile manufacturing recovery is possibly underway, BT quoted DBS economist Chua Han Teng as saying.

But the continued electronics PMI contraction signals that the electronics turnaround is not yet firm, added Chua. “The global economic backdrop is still uncertain amid high interest rates in advanced economies, bumpy conditions in China and lingering geopolitical tensions that could disrupt supply chains.”

Selected earnings in brief

SingPost reported a net profit of S$11.5m for the fiscal first half ended Sep 30, from a net loss of S$9.9 million a year before. The better performance was despite a 13.7% year-on-year fall in H1 revenue to S$827.3m. The revenue decline was mainly due to the “normalising of sea freight rates and volumes post pandemic, as well as foreign exchange impact”.  The net profit was driven by lower volume-related expenses and operating expenses, as well as a smaller loss on exceptional items.

Great Eastern reported a 21% increase in net profit to S$180.2m for its third quarter ended 30 Sep on the back of a 5% increase in total weighted new sales of S$419.4m. For the nine months to 30 Sep, net profit rose 65% to S$617.4m led by higher profit in the Singapore Life business and favourable investment performance in the shareholders’ fund.

First REIT posted a 6.1% fall in distribution per unit (DPU) for the third quarter ended 30 Sep to S$0.0062. DPU for the nine months was S$0.0186, down 6.1% versus the same period last year. Rental and other income for the 9-month period rose 0.6% to S$81.4m but net property income stayed flat at S$79.1m. Distributable income for the nine months was 1.2% lower at S$38.4m. The 3Q distribution will be paid on 22 Dec, after books closure on 9 Nov.

Parkway Life REIT reported a 2.8% increase in DPU for the nine months ended 30 Sep to S$0.1099. This is including a 3Q DPU of S$0.037 which will form part of the second half distribution when the REIT announces its full-year results. Net property income for the nine months was S$104.5m, 26.2% higher than last year, while gross revenue rose 24.6% to S$110.9m. These increases were attributed to contributions from five nursing homes acquired in Sep 2022, as well as higher rent from Singapore properties under new master lease agreements.

SIA Engineering Company reported an 82.6% increase in profit to S$59.3 million for the six months ended Sep 30, 2023. Revenue rose 41.9% to nearly S$514 million in H1, on the back of a rebound in the travel sector, with flight activities growing post-pandemic. This brings earnings per share to S$0.0528 up from S$0.0289 the previous year.

Investing with Insight: Watch this Week’s Technical Outlook