“Fear the Fed”

Date: September 26, 2022

  • Wednesday’s FOMC reinforced the fear of a hawkish US Fed
  • Wall St plunged for 4 consecutive days as bond yields spiked up
  • The 2-year US Treasury yield closed at 4.212%
  • The Straits Times Index dropped 41 points or 1.25% to 3,227.1
  • Bank of England raised rates by 50 points, expects 11% inflation in Oct
  • Singapore’s core inflation rose to 5.1% in August
  • Analysts divided over privatisation offer for SMG
  • Yangzijiang queried by SGX over unusual price surge on Friday

Wednesday’s FOMC brought Wall St to its knees

It was probably the most widely-watched US Federal Open Markets Committee (FOMC) meeting in many years, with expectations high that the Fed would raise interest rates by 75 basis points. That much the market knew; what it didn’t know was what the Fed’s forward guidance would be and whether the US central bank would be able to engineer the “soft landing’’ that investors are hoping for.

As it turned out, expectations for a soft landing have gone out the window following the latest FOMC meeting on Wednesday. The question, now, appears to be how hard of a hard landing will there be.

Fed’s “dot plot’’ shows rates at 4.4% at end of year

Things couldn’t have been more hawkish with the Fed’s “dot plot” showing a benchmark interest rate of 4.4% by the end of this year, as well as a terminal rate of 4.6% in 2023 (up from 3.25% and 3.8%, respectively).

The Business Times on Friday quoted JP Morgan Asset Management Asia-Pacific’s chief market strategist Tai Hui saying that while the market had expected rate hikes, investors may have been taken aback by the Fed’s aggressive stance.

“The fact that the Fed has been continuously revising higher throughout 2022 in terms of their forecasts, it means that 4.6% may not be the end of the story, that they may actually have to revise the rate higher still’’ he said.

Lower growth forecasts and higher inflation estimates were also included in the projections, with the unemployment rate going up to 4.4% and leading to job losses of more than 1m (assuming no change in the size of the U.S. workforce).

On Wed, the Dow Jones Industrial Average fell 522 points, or 1.7%, while the S&P 500 dropped 1.7%, and the Nasdaq Composite declined 1.8%. All three indexes were solidly in the green for a bit after the announcement. The selling continued on Thursday and Friday.

Bond yields rose sharply

The rate hike sent bond yields to new heights. The rate hike, itself, was expected, but the Fed’s indication that it will remain aggressive in lifting rates is causing a sell-off in the bond market, moving yields higher.

The announcement “shows the very high level commitment on the part of the Fed to cut the inflation rate sharply from here and that is what markets are responding to,” wrote Peter Boockvar, chief investment officer of Bleakley Advisory Group.

The 2-year Treasury yield, a barometer for forecasts of the fed funds rate in the future, rose to 3.99% on Wednesday, then hit 4.15% in early Thursday trading. The 10-year yield, more of a barometer of long-term inflation expectations, fell to 3.511% on Wed but rebounded to 3.7% on Thursday.

On Friday, the 2-year Treasury yield rose to 4.212%, a new multi-year closing high whilst the 10-year yield initially rose to above 3.8%, before backing down to about 3.695%.

Bank of England raised rates by 50 points

Over in the UK, the Bank of England last week went for a half-point hike—the same amount as in August—to bring the benchmark to 2.25%. The BoE now predicts that the inflation rate will reach almost 11% in October, scaled back from 13%.

Singapore’s Aug core inflation at 5.1%

Core inflation, which excludes costs of private transport and accommodation and reflects the expenses of Singaporean households more accurately, hit 5.1 per cent year on year in August.

This is higher than the 4.8 per cent rate in July and marks its highest level since it touched 5.5 per cent in November 2008.

August’s headline consumer price index (CPI) or overall inflation came in at 7.5 per cent, matching the 14-year high in June 2008. In July, it had touched 7 per cent.

For the full year, the headline inflation forecast remains unchanged at between 5 per cent and 6 per cent, while core inflation is projected to average between 3 per cent and 4 per cent, said the Monetary Authority of Singapore (MAS) and Ministry of Trade and Industry (MTI) on Friday.

Analysts divided over privatisation offer for SMG

UOB-Kay Hian last week recommended shareholders of Singapore Medical Group (SMG) reject the S$0.37 per share that is being offered by TLW Success to take SMG private.

The broker noted that the offer falls short of its S$0.45 target and that it represents a valuation multiple of 11.5 times FY2021 earnings, lower than the 16 times offered to take Singapore O&G private.

“Armed with better overseas exposures in Vietnam, Indonesia and Australia (compared to Singapore O&G) we think there could be potential upside to SMG’s offer’’ said UOB-Kay Hian.

Lim & Tan Securities on the other hand, said while the offer price is below its S$0.43 target, it views the deal as “reasonable but not compelling’’ considering the current depressed market conditions.

Yangzijiang Shipbuilding queried by SGX

Yanzijiang Shipbuilding was queried by the Singapore Exchange on Friday after its shares hot up in active trading. The gained as much as S$0.17 or 15.5% at S$1.27 before closing at S$1.24 for a gain of S$0.14 or 12.7%. Some 153.7m shares worth 183m were traded.

The company said the trading activity could be linked to two media reports, dated Sep 19 and 20, in connection to its Sep 8 announcement about the company’s entry into a technical assistance and license agreement with France-based Gaztransport & Technigaz (GTT).

The first report was by The Singapore Business Review, which questioned what is ahead for the company’s LNG orders, calling such orders “key catalysts’’. The second was by The Edge, which carried a CGS-CIMB “buy’’ on the stock with an unchanged target price of S$1.63. The broker said the GTT license will allow the company to build large LNG carriers above 100,000 cubic metres.