The Fed paused, but US interest rate uncertainty remains

Date: September 25, 2023

  • The US Fed held rates steady but indicated few cuts next year
  • All major US indices lost ground for the week
  • The Straits Times Index fell 2.3% to 3,204.82
  • US Treasury yields remained elevated
  • Probability of a November rate hike is now 26%
  • Singtel to sell 20% of regional data centre business for S$1.1b
  • Analysts “buy’’ on Singtel were maintained
  • SingPost announced rate hike, analysts divided
  • Creative Tech shares up 20% after announcing partnership with Skyworth
  • Singapore’s exports fell for an 11th straight month in August


The STI fell 2.3% to 3,204.82 after the Fed indicated fewer cuts next year

As had been widely expected, the US Federal Reserve held its benchmark federal funds rate stead at Wednesday’s meeting. However, it also indicated that it sees another hike this year, whilst its summary of economic projections (SEP) for 2024 suggests only two quarter-point cuts ahead, fewer than had been previously projected.

In response, US stocks closed in the red on Wednesday after the announcement, with the selling intensifying on Thursday and Friday.

For the week, the Dow Jones Industrial Average lost 1.9%, whilst the S&P 500 and Nasdaq fell 2.9 and 3.6% respectively.

Here, the Straits Times Index, which had risen 73 points the previous week, fell 76 points or 2.3% to finish at 3,204.82. Average daily volume was a weak S$828.6m.

The Fed is determined to bring inflation down to 2%

“We want to see convincing evidence, really, that we have reached the appropriate level,” Powell told reporters on Wednesday. “We’ve seen progress, and we welcome that—but you know, we need to see more progress before we would be willing to reach that conclusion’’.

The SEP forecasts inflation to drop to 3.3% by year-end, and to approach the central bank’s average annual 2% target. The updated projections see the Fed funds target rate edging down to 5.1% by the end of next year, and to 3.9% by the end of 2025.

US Treasury yields remain elevated

The 10-year yield, a key barometer for the economy, dipped 0.041 percentage points to settle at 4.438%, its second-highest level in 2023. The 30-year yield, which reached 4.521%, also marked its second-highest level so far this year.

Probability of rate hike in Nov now 26%

As of Friday, the futures market is pricing in a 75% chance that the Fed will keep rates unchanged at its November meeting, which means the probability of a 25-basis points hike at the meeting is now 25%.

Singtel to sell 20% of regional data centre business for S$1.1b

Singtel on Monday announced that it has agreed to sell a 20% stake in its regional data centre (RDC) business to U.S. private equity giant KKR for S$1.1 billion.

The deal puts the enterprise value of the Singtel unit at S$5.5 billion, according to a joint statement on Monday. It marks KKR’s largest investment in Southeast Asian infrastructure and data center infrastructure globally. The New York-headquartered investment firm will have the option to raise its stake to 25% by 2027.

Analysts positive on SIngtel

CGS-CIMB maintained its “add’’ call on Singtel with an unchanged target price of S$2.80.

“While the implied transaction multiples appear higher compared to global data centre operator peers’ 20- 25x trailing EV/EBITDA (Enterprise Value/Earnings Before Interest, Tax, Depreciation and Amortisation) we think the deal is fair considering contribution from Singtel’s data centres in Thailand and Indonesia (91 MW) are not consolidated given they are 35%-owned associates, and Singtel’s RDC FY2023-2026 EBITDA growth is likely stronger versus peers given its almost doubling of capacity in Singapore to 120MW by 2025F (currently: 62MW)’’.

UOB Kay Hian also its “buy” call and $3.15 target price, whilst RHB set a S$3.40 target.

The RHB research team is upbeat on another S$4 billion in capital recycling awaiting the group over the next two years, which is expected to bring upside to dividends.

“Given the group’s strong balance sheet (over S$3 billion cash hoard as at 1QFY2024), debt headroom and excess cash (S$2 billion) after the payment of 5G capex and spectrum, we see scope for further additional/special dividends (over and above the ordinary payout of 60-80% of group core earnings),” said RHB.

SingPost to raise postal rates; analysts divided

SingPost on Tuesday announced that it is raising the postage rate for standard regular mail from S$0.31 to S$0.51 – an almost 65 per cent increase – amid rising costs and declining mail volume.

The S$0.20 increase reflects the “escalating costs of maintaining the postal service”, SingPost said in a media release on Tuesday (Sep 19), adding that the new postage rates will take effect from Oct 9 this year.

The last significant rate increase was nine years ago in 2014 when rates were increased from S$0.22 to S$0.30, according to SingPost.

Lim & Tan Securities said whilst the rate hike is a “much-needed shot in the arm’’ for SIngPost, it does not think it will be sufficient to address the structural decline in mail volumes and business.

At Monday’s closing price of S$0.485, the broker said SingPost is valued at S$1.1b and trades at a consensus forward price-earnings ratio of 24. Lim & Tan also noted that Bloomberg’s consensus one-year target prices of S$0.52 implies potential upside of just 6.1%.

CGS-CIMB however, upgraded the stock from “hold’’ to “add’’ and lifted its price target from S$0.52 to S$0.60. “We think the upcoming postal rate hike could help SingPost plug its widening postal losses, enabling investors to focus on its growing logistics business’’ said the broker.

Creative Tech shares up 20% after announcing partnership with Skyworth

SHARES of Creative Technology surged S$0.23 or 20% per cent to close at S$1.40 on Friday, a day after the group announced a strategic partnership with Chinese electronics company Skyworth.

Volume traded was 448,350, significantly higher than its average trading volume of 13,756.

The company said that the partnership “opens avenues for future collaboration between Creative and other industry partners” to bring the SXFI technology to a wider array of consumer electronics and personal computer platforms.

Singapore’s exports fell for an 11th straight month in August

Singapore’s non-oil domestic exports (NODX) fell 20.1% year-on-year in August, the 11th consecutive drop as both electronics and non-electronics exports to the United States, Europe and China declined.

The decline compared with a forecast in a Reuters poll of a 15.8% contraction, and continued the 20.3% contraction seen in July.

Compared with the previous month and seasonally adjusted, August exports fell 3.8 per cent, sharper than the 3.5 per cent drop in July, data from trade agency Enterprise Singapore (EnterpriseSG) showed on Monday.

The Straits Times quoted OCBC Bank chief economist Selena Ling saying that NODX shrank 16.2% year on year in the first eight months of 2023.

“Even with a gradual improvement for the remaining months, full-year NODX is likely to contract at least 11% year on year. If this materialises, this would potentially mark the worst annual NODX performance since 2001, when it shrank by 14.5%,” she said.

The Government has forecast that NODX will contract by 9 per cent to 10 per cent in 2023 but has said a technical recession is not likely.

DBS economist Chua Han Teng was quoted saying that although the economic outlook is very uncertain, there are few rays of hope. “For NODX, at least the electronics decline on a 3-month moving average basis has bottomed out and is starting to gradually recover. The non-electronics drop was partly due to last year’s high base – for example, pharmaceuticals, which also tend to be volatile’’.

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