Inflation and interest rate hikes return to drag STI down 1.5%

Date: June 13, 2022

  • The STI lost 50 points or 1.5% over the week at 3,181.73
  • Average daily volume was a low S$1.15b
  • Inflation in Europe and the US were main worries
  • Stocks plunged on Thursday after ECB announced rate hikes
  • Wall St plunged on Friday after release of May’s CPI numbers
  • Bond yields spiked up, futures market now expecting higher Fed hikes
  • MAS survey shows private sector economists expect 3.8% growth this year
  • Singapore property is still an overweight: CGS-CIMB
  • Outlook for ASEAN equities still positive: Maybank

Inflation and interest rate worries sweep stocks lower

Against the backdrop of a nervous Wall Street and Europe, both of which are grappling with inflation and growth headwinds, the local stock market last week underwent a relatively rocky week during which the Straits Times Index traded within a narrow band before sliding on Thursday and Friday to finish at 3,181.73, for a net loss of 50 points or 1.5%.

Average daily volume was a low S$1.15b, ranging from S$939m done on Monday to S$1.5b on Wed. All three banks ended the week lower. Also dragging the index down were Singtel, Jardine Matheson and property plays City Developments and CapitaLandInvest.

Europe’s inflation and the ECB’s actions are the latest worry

According to reports, Europe is the latest worry. Eurozone Gross Domestic Product (GDP) for the first quarter grew just 0.6% from the fourth quarter, compared with the same period last year when growth was 5.4%.

The strong showing increases the odds that the European Central Bank, will move aggressively when it begins raising interest rates to combat inflation.

These odds showed themselves on Thursday after the European Central Bank said it planned to raise interest rates in July by 25 basis points and again on Sep 8. It also said the Sep 8 hike could potentially be larger if inflation in the euro zone does not show signs of easing.

“We will make sure that inflation returns to our 2% target over the medium term’’ said ECB president Christine Largarde. “it is not a step, it is a journey’’.

Inflation and rate fears also hitting Wall St

The same fears have kept the bulls at bay in the US where the Federal Reserve is expected to lift rates by half a percentage point at this week’s Open Markets Committee meeting and by the same amount next month. The worry, however, is that with inflation remaining stubbornly high, the Fed will have to be more aggressive in future meetings.

On Friday, Wall St tanked after news that consumer prices surged across the board in May, defying some economists’ expectations for a peak in inflation and intensifying pressure on the Federal Reserve to aggressively raise rates in coming months.

The consumer-price index leapt 1% in May, the Labor Department said Friday, up from a 0.3% increase in April. Economists had expected prices to rise 0.7% in May. For the full year, the CPI reaccelerated to a 40-year high, jumping 8.6% in May from an 8.3% pace in April. Economists had expected an 8.3% annualized increase in May.

Bond yields spiked up, futures market now pricing in higher rate hikes

Bond yields leapt, with the benchmark 10-year Treasury note’s yield climbing to 3.11% up from around 3.06%; prices and yields move oppositely.

Futures markets quickly began pricing in higher rate hikes in coming Fed meetings. While half-point rate hikes have been largely priced in for June and July, the chances of a three-quarter-point hike have increased since Thursday, according to CME Group’s FedWatch Tool.

Expectations for the September meeting, which had been shifting to a half-point hike, now show an increasing chance of a three-quarter point hike.

Private sector economists expect GDP growth of 3.8% in 2022: MAS survey

A quarterly survey published by the Monetary Authority of Singapore showed that private sector economists expect Singapore’s GDP this year to expand by 3.8% in 2022, down from 4% previously.

Respondents also believe that headline inflation could reach 5% for the full year, up from 3.6% in the previous survey.

Uncertainty over China’s growth was a key downside risk that was cited by 47.1% of respondents versus 22.2% previously. However, the proportion who cited China as an upside risk doubled to 60%.

Singapore property is still an “overweight”: CGS-CIMB

Local brokers CGS-CIMB last week reiterated its “overweight’’ call in the property sector after the announcement of the latest Government land sale (GLS) programme.

“Whilst the overall residential land supply earmarked under H2 2022 GLS is the highest level since end-2018, it is still below the average supply over the past 10 years of 9,000 units’’ said analyst Lock Mun Yee.

CGS-CIMB added that the URA Property Price Index recorded a 0.7% quarterly improvement for Q1 2022, supported by a 2.2% price hike for outside of central region properties. The broker maintained its expectation that private home prices will rise by up to 5% for the whole of 2022 and maintained its “add’’ calls on CapitaLand Investment, City Developments and UOL.

Outlook for Asean equities still positive: Maybank

In its 7 June Invest Asean Chartbook, Maybank said its Asean country heads of research remain constructive on the market upside, especially as 1Q22 reporting has generally delivered on expectations of a sharp earnings rebound post-economic reopening.

“A broadly favoured sector is banks/financials – besides being economic proxies, valuations are attractive, high capital ratios mean dividend upside and rising interest rates are a margin tailwind. Consumer and property sectors are also favoured, though selectively given inflation (prefer staples over discretionary) and interest rates (greatest leverage where household debt and ownership are lowest, i.e., Indonesia, the Philippines and Vietnam)’’ said Maybank.

“From a structural perspective, Indonesia and the Philippines stand out for aggressive corporate tax cuts initiated during the pandemic, while the Singapore banks and Vietnam are the best plays on supply chain relocation’’.