US rate fears continue to weigh on markets

Date: February 20, 2023

  • The Straits Times Index lost 1% at 3,328.37.
  • Uncertainty over direction of US interest rates were main cause.
  • Latest US CPI figures and comments by Fed officials spooked Wall St.
  • US Treasury bond yields rose, as did probability of 50-points rate hike in March.
  • DBS reported record profits, special dividend but stock tumbled.
  • Singapore’s NODX fell 25% in January


The STI fell victim to US rate fears

Will the US Federal Reserve continue raising interest rates for much longer to combat inflation, possibly to the point that the economy enters a recession, or will inflation ease off soon, in which case rate hikes will taper off and possibly even lead to rate cuts?

That’s the $64,000 question that markets have been grappling with for the past few months, the answer to which is not yet clear. The uncertainty over this issue and the resulting volatility it is causing on Wall Street last week led to a 32 points or about 1% loss for the Straits Times Index at 3,328.37.

As for the main US indices, the Dow Jones Industrial Average lost 0.1%, the S&P 500 fell 0.3%, and the Nasdaq gained 0.6%.

What will the Fed do?

Wall Street is looking for signs that decades-high inflation is cooling enough to allow the Fed to slow or stop hiking interest rates, but consumer-price index data released on Tuesday last week disrupted that narrative.

While inflation fell on an annual basis from December, it accelerated on a monthly scale—a combination that contributed to volatile trading on Tuesday, and the negative sentiment leaked into Wednesday.

Overall, the report showed that inflation is still coming down from year-ago levels, but a hot economy and tight labour market are keeping inflationary pressures strong across the board.

“Inflation may have peaked, but it’s not showing signs of rapidly returning to the Fed’s long-run goal of 2%,” said John Leer, chief economist with decision-intelligence firm Morning Consult. “The fight against inflation is far from over.”

“Beneath the headline readings, the data suggest that inflation is moderating less swiftly than had been hoped by economists. Together with the unexpectedly strong January jobs report, the latest inflation print adds to the risk that the Federal Reserve may have to do more to ease price pressures,” UBS Chief Investment Officer Mark Haefele wrote.

Speeches from St. Louis Fed President James Bullard and Cleveland Fed President Loretta Mester on Thursday supported the idea that the Fed will have to continue to raise interest rates to combat continuously high inflation.

Bullard said he can’t rule out a 50 basis point hike at the March meeting, according to reports whilst Mester said that “given the risks and costs, we need to be prepared to move the federal funds rate higher if the upside risks to inflation are realized and inflation fails to moderate as expected or if the imbalances between demand and supply in product and labour markets persist longer than anticipated.”

Bond yields rose, market now pricing in rising chance of 50-points hike in March

The rate-sensitive two-year Treasury note rose for seven straight days, finishing the week at 4.66%, whilst the 10-year yield closed at 3.88%. In the futures market, the current probability of a 25-basis points rate hike in March is 85%, whilst the chance that the Fed will raise rates by 50 points is 15%. However, the latter probability was 9% a week ago.

DBS reported record Q4 profit, proposed special dividend but its stock price plunged

DBS on Monday reported that net profit for the three months to December 2022 jumped 69 per cent to S$2.34b, beating analysts’ forecasts in a Bloomberg poll that the figure would be S$2.17b.

Earnings for the full year surged by 20 per cent to S$8.19 billion while fourth-quarter return on equity – a measure of how efficiently a company generates its profits – stood at 17.2%. Both of these were also new records.

Its board has proposed a final dividend of S$0.42 a share for the fourth quarter, up from S$0.36 cents a year ago, and a special dividend of S$0.50 cents a share. This brings the total payout for the full year to S$2 a share.

Despite a sterling set of numbers, DBS’s shares came under pressure..

The Business Times reported that analysts had mixed reactions to the results with UOB-Kay Hian and RHB Research raising their target prices to S$45.80 from S$45.35 and S$42 from S$41.10 respectively, but with CGS-CIMB lowering its target price to S$35.70 from S$36.50.

In UOB-Kay Hian’s case, it noted the numbers were above expectations and raised its earnings forecast for DBS by 2% to factor in lower specific provisions whilst basing its new target price on 2.03 times FY2023 price/book. The broker believes DBS will continue to enjoy net interest margin (NIM) expansion after this grew a sizeable 62 basis points to 2.05% in Q4 FY2022.

RHB-Research also maintained its “buy’’ on DBS, highlighting NIM expansion, resilient asset quality and the special dividend as key standouts. RHB believes the bank’s robust topline growth will lift FY2023 earnings by 27%.

CGS-CIMB on the other hand, foresees NIM stabilising in FY2023 and maintained a “hold’’ on the stock. It said whilst DBS is expected to be a key beneficiary of continued US rate hikes, this has already been priced into the stock price. The broker believes DBS’s lower peak NIM expectations are likely due to higher funding cost pressures from an outflow from current and savings accounts into instruments like T-bills that offer competitive yields.

DBS’s shares fell for three straight days between Monday and Wednesday, losing S$1.33 or 3.7% along the way at S$34.70, before rebounding S$0.32 to finish the week at S$35.02. For the week, the net loss was S$1.01 or 2.8%.

Singapore’s NODX down 25% in Jan

Singapore’s non-oil domestic exports (NODX) fell 25% year-on-year in January, the fourth consecutive month of decline. It was the worst start to a year since the US sub-prime crisis in January 2009, and outstripped the median fall of 21.9% forecast by economists in a Bloomberg poll.

Maybank economists Chua Hak Bin and Lee Ju Ye were quoted by the Business Times saying the weakness is “consistent with the performance of other export-oriented countries’’. Oxford Economics senior Asia economist Alex Holmes was also quoted saying “A turn in the semiconductor cycle continues to hurt exports. In January, the value of domestically-produced chip exports fell further below their March 2020 pandemic low and to almost half of their recent peak in May 2022’’.

On the plus side, RHB senior economist Barnabas Gan was quoted reiterating his belief that market fears of a global recession are overdone. “Rather than for us to adhere to ‘herding behaviour’, we expect the analyst community to gradually shift towards a more positive outlook for Singapore’s economy towards H2 2023’’.

“We notice that this is already materialising: market risk appetite has shifted considerably since the year started, led by expectations of a slower pace of rate appreciation across developed and developing economies and the recent opening of China’s borders’’ said Mr Gan.

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