All eyes on this week’s FOMC

Date: September 19, 2022

  • After last week’s US CPI figure, market is assigning 18% chance rates will rise 100 points this week
  • Despite Wall St’s plunge, the STI gained 6 points or 0.18% at 3,268.29
  • US Treasury yield curve remains inverted, short-yields nearing 4%
  • FedEx and GE announcements add to slowdown worries
  • SGX’s securities turnover down 7.4% in Aug
  • UOBKH downgraded SGX to “hold’’, target from S$10.85 to S$10.04
  • SGX RegCo to require exact pay disclosures, limit ID tenures
  • Moya, SMG and Memories Group receive delisting offers
  • Aug’s NODX up 11.4% but electronics exports down 4.5%

US market now pricing in 18% chance of 100-basis points hike this week

A week ago, the US federal funds futures market gauged that the chance of the US Federal Reserve raising interest rates by 75 points at its meeting this week was about 90%, whilst the chance of a 50-points hike was 10%.

As of last Friday, the chance of a 75-points hike had dropped from 90 to 82% but the chance of 50-points is now zero. Instead, the market now thinks there’s an 18% probability that the Fed will raise rates by a full percentage point.

The STI held up well, rising 0.18%

However, despite Wall St’s sharp plunges last week brought on by fresh interest rate worries, the local market held up remarkably well, with the Straits Times Index managing a 6 points or 0.18% rise to 3,268.29. Daily volume was generally low at around S$1b but this spiked up on Friday to S$1.89b.

Four counters contributed 30% of Friday’s dollar turnover – DBS (S$198m), Jardine Matheson (S$139.4m), OCBC (S$128m) and Singtel (S$94m).

US yield curve remains inverted, with short yields nearing 4%

Higher rate expectations are now being priced into the US Treasury market where investors now can get a rate of 3.18% on the three-month T-bills, 3.78% on six-month T-bills and 3.92% on one-year bills, according to Bloomberg. The one-year T-Bill has one of the higher Treasury yields. The 10-year note, in the meantime, yields 3.4%.

Note that short rates are higher than long rates, which means the US yield curve is still inverted, which traditionally has been taken to mean an impending recession.

Tuesday’s CPI was indeed key

As highlighted in last week’s report, Tuesday’s consumer price index data proved the key turning point. The shift in interest rate expectations came about when news hit Wall St that day that the CPI in August was higher than expected, thus placing additional pressure on the Federal Reserve to remain aggressive in lifting interest rates.

In afternoon trading last Tuesday, the Dow Jones Industrial Average dropped 1,276 points, or 3.9% to 31,104. The S&P 500 declined 4.3% to 3,932 and the Nasdaq Composite crashed 5.2% to 11,633. The indexes were all higher before the inflation data came out and posted gains for four straight sessions coming into Tuesday.

Consumer prices rose at an 8.3% annualized rate in August, higher than the estimate for an 8% increase. That’s a slowdown from the July result and it’s the second month of inflation-rate declines, though it’s falling more slowly than expected.

“The August report clearly sends a hawkish message as the signs of decelerating price pressures in the July proved to be short-lived,” wrote Ellen Zentner, economist at Morgan Stanley.

For the week, the Dow slipped 4.1%, while the S&P 500 fell 4.8% and the Nasdaq dropped 5.4%.

FedEx and GE announcements add to slowdown worries

FedEx said Thursday afternoon that global volumes declined in the quarter because the global economy is suffering. The company reported sales for the quarter that were below analysts’ consensus estimate, while rising costs also ate into earnings. The stock dropped 21%.

General Electric said supply chain problems prevented it from meeting demand. The company now expects US$5 billion in free cash flow for the full year, US$1 billion lower than the previous guidance. The stock fell 3.7%.

SGX securities turnover slid 7% to S$24.3b in Aug

Total securities turnover on the Singapore Exchange (SGX) fell 7% year-on-year in Aug to S$24.3b despite a 1% increase in unit volume to 31.6b units.

Month-on-month, turnover value was 35% higher, which was attributed to the corporate earnings reporting season and strong month-end rebalancing.

“Institutional portfolio rotation led to an estimated S$750m in net institutional inflows in Aug, the highest since January and mainly into the financials and consumer sectors’’ said SGX.

Securities daily average value (SDAV) stood at S$1.1b in Aug, 12% lower year-on-year but 22.6% higher month-on-month.

UOBKH downgraded SGX, target price down from S$10.85 to S$10.04

Local brokers UOB-Kay Hian last week downgraded SGX from “buy’’ to “hold’’ despite noting robust contributions from forex and commodities derivatives. It lowered its SGX target price from S$10.85 to S$10.04.

The revised target implies a price-earnings multiple of 22.2 times FY2023 earnings, down from 23.5 as the broker reckons there are no near-term catalysts to justify a higher valuation.

This comes as expectations of higher treasury income from interest rate hikes have already been priced in, according to UOBKH. It also expects SDAV to continue its downtrend.

SGX RegCo to limit ID tenures and require proper pay disclosures

In a statement last week, Singapore Exchange Regulation or SGX RegCo said it is planning to make companies disclose exactly how much they are paying their chief executives and directors. The frontline regulator also said it intends to limit the service of independent directors or IDs.

An independent review of listed companies’ Code of Corporate Governance disclosures by KPMG found that improvement is needed on board renewal and remuneration, said SGX RegCo.

Only 35% of companies disclosed director remuneration in dollar value, while only 18% did the same for CEOs. The majority used salary bands.

Since the start of this year, IDs who have served 9 years or more would no longer be considered independent unless approval is obtained at 2 tiers of voting: first, from all shareholders and second, from shareholders excluding directors, the CEO and their associates.

According to SGX RegCo CEO Tan Boon Gin, there were hopes that the 2-tier voting would encourage shareholders to weigh in on those long-serving IDs and that companies would use the 3-year notice period which started in 2018 to gradually plan succession.

Instead, a Nanyang Business School study found that companies rushed to use the 2-tier vote to retain their long-serving directors: 70% of 391 long-serving ID seats which were up for re-election were put to the 2-tier vote in 2021 and 2022.

Moya Holdings, Singapore Medical Group and Memories Group receive delisting offers

On Tuesday, Catalist-listed tourism company Memories Group announced it has received an offer to delist the company at a price of S$0.047 per share in cash, or in lieu of cash, one new ordinary share in the capital of the Offeror at the price of S$0.047. The new shares are not expected to be listed or traded on any exchange. The Offeror is led by the company’s executive chairman Serge Pun.

Also on Tuesday, an investment vehicle led by top executives at Catalist-listed Singapore Medical Group (SMG) launched an offer to take the company private at S$0.37 per share or one new share in the offeror. Called TLW Success, the vehicle is equally owned by SMG’s non-executive chairman Tony Tan Choon Keat, chief executive Beng Teck Liang and executive director Wong Seng Weng.

On Wednesday, Catalist-listed Indonesian water treatment operator Moya Holdings announced plans to take the company private through a voluntary cash offer from Tamaris Infrastructure, a majority shareholder of Moya. The offer is S$0.092 per share. As of the date of the offer, the offeror held 72.8% of Moya’s shares.

Aug NODX up 11.4% but electronics shipments down 4.5%

Non-oil domestic exports (NODX) expanded 11.4% year on year in Aug, beating the 8.3% rise forecast by analysts in a Bloomberg poll. However, exports of electronics fell 4.5%, following growth of 10.3% in July.

According to news reports, economists are bracing for slower NODX growth in the second half of this year, even if they are holding on to their full-year outlook for now.

The Business Times quoted Maybank economists Chua Hak Bin and Lee Ju Ye saying the sharp decline in electronics exports has raised the risk of a technical recession, defined as two consecutive quarters of negative sequential GDP growth.