After a pause, what’s next?

Date: June 19, 2023

  • The US Fed paused in its rate hikes but signalled more in store
  • Futures market now pricing in 74% chance of 25-points hike on 26 July
  • STI rose every day, adding 74 points or 2.3% at 3,260.03
  • SIA in focus, refuted media report whilst downgraded by Morgan Stanley
  • Private sector economists downgraded 2023 GDP growth to 1.4%
  • SGX’s securities turnover up 23% in May
  • Singapore’s NODX down 14.7% in May, risk increases of a technical recession


The Fed decided on no rate hike, but left the door open for more later

Last week’s main market-moving event was the US Federal Open Markets Committee meeting. Prior to the meeting, markets had been widely expecting the Fed to keep interest rates steady and as it turned out, this was what the US central bank delivered.

However, although the Fed chose to skip a rate hike thus halting a series of 10 increases that stretches back to March 2022, it also signalled it may need to take rates higher this year, with half of the policy committee expecting rates to increase by another half-point.

Probability of 25-points hike in July is now 74%

As a result, the futures market immediately started pricing in a roughly 74% chance of a 25-basis points rate increase at the Fed’s July 25-26 meeting, according to the CME FedWatch Tool.

Fed signalled no rate cut yet

Perhaps more disappointing for markets was that there are no rate cuts on the horizon.

“Not a single person on the committee wrote down a rate cut this year, nor do I think it is at all likely to be appropriate if you think about it,” Fed Chair Jerome Powell said, referring to policy makers’ projections of where rates are headed. “Inflation has not really moved down—it has not so far reacted much to our existing rate hikes’’.

Wall St still optimistic

Despite this, it appeared that US investors are still optimistic that maybe the Fed’s work is almost done – although Wall St prices fell on Friday, the Dow Jones Industrial Average, the S&P 500, and Nasdaq ended the week up 1.3%, 2.6%, and 3.2%, respectively.

The STI gained 2.3% to reclaim the 3,200 mark

As far as trading here was concerned, the Straits Times Index managed to regain the 3,200 level that it had lost on 29 May. It climbed every day last week, adding a total of 74 points or 2.3% to 3,260.03. Average volume improved to S$1.43b per day versus S$1.08b the previous week, boosted by the S$2.61b that was done on Friday.

SIA was very much in focus, Morgan Stanley said positives priced in

Singapore Airlines was the standout performer of the week, gaining S$0.52 or 7.2% at S$7.77. On Friday however, the stock dropped S$0.14 in volume of 41m, adding a hefty S$319m to turnover that day. The fall ended a 12-day winning streak.

SIA on Friday refuted a media report which said it may raise its stake in Air India to create a bigger full-service national carrier for India. Reuters news reported that SIA said that a story carried by Indian newspaper Mint dated 16 June 2023 is incorrect. “There is no change in SIA’s position from the Nov 2022 announcement’’ said SIA.

Analysts from Morgan Stanley suggested that the surge in the stock’s share price mean that positives have been priced in. They downgraded SIA from “overweight’’ to “even-weight’’ in a Friday report with a revised target of S$7.30, noting that the counter had risen 43% year-to-date and 34% for the month.

They switched their valuation framework from price-to-book to enterprise value against earnings before interest, taxes, depreciation and amortisation on the basis that this would better capture post-pandemic profitability.

However, Morgan Stanley also portrayed a bull case for the airline if cargo yields stabilise at current levels and costs remain well controlled. If so, SIA’s earnings could grow 15%, in which case the price could rise to S$9.30.

SGX’s securities turnover up 23% in May

The value of securities traded on the Singapore Exchange rose 23 per cent month-on-month in May to S$23 billion.

SGX noted that activity in the commodities and equities markets was “buoyant” versus April levels, while total derivatives traded volume in May rose 16 per cent month on month to 20.5 million contracts from 17.7 million earlier.

Commodity derivatives volumes registered a 13 per cent rise from April to 3.8 million contracts amid growing demand for risk management.

“SGX’s securities daily average value (SDAV) was up 7% month-on-month to S$1b even as the Straits Times Index ended May down 3.4%’’ said SGX. “Technology is still the strongest sector in global stock markets as well as the Asia-Pacific with the Lion-OCBC Securities Hang Seng Tech ETF the most traded Singapore-listed ETF in May’’.

Private sector economists lower Singapore’s 2023 growth forecasts

In the latest quarterly survey conducted by the Monetary Authority of Singapore (MAS), Singapore’s 2023 gross domestic product (GDP) growth has been lowered to 1.4% from 1.9% previously, weighed down by a contraction in manufacturing as well as a deeper slump in non-oil domestic exports.

However, compared with the previous survey, the outlook for construction as well as accommodation and food services improved.

DBS economist Chua Han Teng was quoted by the Business Times as saying his bank thinks that the weaker 2023 outlook is due to the soft global demand facing Singapore’s externally-oriented economy as advanced economies are grappling with high interest rates and the post-pandemic recovery in China has been bumpy.

Maybank senior economist Chua Hak Bin added that economists have downgraded their forecasts on the back of a weak first quarter and the higher risk of a technical recession. Also, Maybank’s forecast growth for the year is lower than the 1.4% consensus at only 0.8% while UOB’s is 0.7%.

Singapore’s non-oil domestic exports down 14.7% in May, risk of technical recession increased

On Friday came news that non-oil domestic exports slumped 14.7% in May, far worse than the 7.7% that economists had expected. It was the eight consecutive month of contraction and was led by both electronics and non-electronics.

The Business Times quoted RHB’s senior economist Barnabas Gan and UOB’s senior economist Alvin Liew as saying there is now heightened risk of a technical recession in the first half of 2023.

Investing with Insight: Watch this Week’s Technical Outlook