Kenanga Research & Investment
U.S. Fed FOMC Decision Signals QE3 taper end of the year, rate hike timing unclear
Out of the closet. Federal Reserve Chairman Ben Bernanke and The Federal Open Market Committee (FOMC) has re-affirmed its intention to start scalling back its quantitative easing (QE) programme in the next few months. At the same time, however, it seems that the indication for policy tightening via rate hike is still unclear.
Data dependent. So far, it appears that data flow is supportive of its mindset change to reduce the US$85b a month asset purchase programme, dubbed QE3 sooner than originally expected. The Fed expects the U.S. unemployment rate to fall faster by end of this year between 7.2%-7.3% from 7.6% in May and next year (2014: 6.5%-6.8%) than it did in March (6.7% to 7.0%). Nonetheless, the 6.5% level is significant because the Fed has said it plans to keep the short-term interest rate at record lows or near zero at least until unemployment falls to that level which it thinks could be reached by the end of next year.
Risk to balance sheet. At the rate the QE3 is going, the Fed’s balance sheet is heading toward US$4 trillion as Bernanke seeks to reduce a jobless rate that stands at 7.6% after four years of economic growth to at least 6.5%. Since August 8, 2007, the Fed's balance sheet has grown from US$869b to its current level of US$3.453 trillion (Fig. 1). The Fed’s open-ended purchases, started last September and expanded in December, are unprecedented and pose a potential risk to its balance sheet. The U.S. government debt to GDP has ballooned to 101.6% of GDP from 64.8% of GDP in 2008.
Market adverse reaction. Being the major recipient of hot money, concerns over large outflow of portfolio capital would dominate the emerging market in general over the next few months as the trend reversal would put downward pressure of domestic assets, especially equities and bonds. The Bursa will not be immune to selling pressure. However, we maintain our view that domestic liquidity remains favourable and ample to absorb the current sell-off. Furthermore, improvement in the U.S. economic environment along with the weakened ringgit would spur higher demand for exports going forward. While equity research expects a lower FY13E core net earnings growth, the year-end target for FBMKLCI is 1,800. This is largely because of the roll-over of valuation base year to FY14. At the same time, equity research has also fine-tuned its 12-month index target to 1,845.
Ringgit under pressure. The downward pressure on the ringgit mounts as a result of the large outflow of capital due to redemption of foreign capital from the equity and bond market. As expected, the ringgit continued to depreciate further, to almost 3.20 against the greenback, lowest since July last year. We maintain that the level of volatility would remain heightened well after the Fed starts to scale back QE3. However, we remain firm on the fundamentals supporting the ringgit; strong domestic economy and improving external demand in 2H13. However, we are revising our dollar/ringgit year-end target to 3.05 from 2.97 to reflect the heightened volatility and the regional currency weakening.
Policy tightening unclear. Though it’s safe to predict that the start of QE3 taper would be anytime before end of this year, it would still be unwise to conclude that Fed’s policy tightening would be anytime soon. Assuming it implements the QE tapering at a gradual pace to ensure that a full recovery is on track, we are looking at least another nine to twelve months before the Fed would revise its zero interest rate policy. Given the external as well as domestic uncertainties (subsidy rationalisation and implementation of GST) we maintain our outlook on BNM’s monetary policy - unchanged and the Overnight Policy Rate to stay at 3.00% till end of this year and possibly well into 2014.
Source: Kenanga
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Be the first to like this. Showing 25 of 25 comments
so far less than 2% inflation leaves room for his monetary policy to manouver, but the buying can't last forever.
2013-06-20 11:09
We really need to hope that BNM will not come out with RM30,60 or 70 note :)
2013-06-20 11:26
Haha then we can temporary go Genting to play slot machine already,since forum kaki possibly will have some rest time at home studying TA or FA...
2013-06-20 11:31
Nazir razak came out with statement that hot money will eventually leave this region. That may have exacerbate today's drop. In all fairness, market here valued already. Unless US sinks further, hot money will move back. Thankfully Malaysia insulated with larger local borrowing than foreign ones. US recovery is a double edged sword. You guys better pray for china recovery soon enough. Don't see the bull coming now! :(
2013-06-20 11:56
This is still subjected to monitoring. He will still have to answer at Capitol Hill panel when time comes.
2013-06-20 12:00
last mission for Bernanke is to set course for easing up on stimulus b4 he left Jan 2014. unless otherwise, v should c U.S economy to continue improve, which should benefit china, and hopefully EU can catch up second half. if not, maybe v c qe4 ;D
2013-06-20 12:04
Market is uncertain since Obama's remark. They are assuming Bernanke will dismantle the loose monetary policy before he goes. Market, especially US, is trying to assess if the president wants somebody to jump start the economy again. For now, 2013 will be turbulent.
2013-06-20 12:05
For those who watch the last session at Capitol Hill, would know the panel acknowledge the difficulty in Bernake last decision whilst hold the opinion to balance the moving forward to tapper with subjected info. What this means is, the current indicator of markets are giving diverse info which do not converge. So the subjective monitoring will point to only a few indicator to ensure the move forward is with a basis.
2013-06-20 12:07
they always said a bunch of points, but they only execute one of it & they already knew which one b4 testify. keep monitor the market trend and finally u will realize which was it - but hopefully not too late. as small player like klci - don't fight the wave :D
2013-06-20 12:11
That is correct. US market is akin to an addict basically living off quantitative easing.
Either way, Bernanke is in no man's land. I still believe zero rate is not the way to go! How about rate hike and continuous buying? Malaysianomics! Hehehe
2013-06-20 12:11
This is really a old story with a new twist. With the demarcation of borders gone global, they should know the indicators cater partial. Ask the EU and UK who are now very familiar.
Just look at the taxes evaded and u know this is a potential outbreak.
2013-06-20 12:12
No lah KC, even Najib says one thing but at the back, all the outflow are thru companies associated with him. GLC companies and the top 30 is hard to track this days.
2013-06-20 12:14
Sigh.....back to monitoring again.
Tommylou, think about it: rate hikes and continuous buying of bond! LOL
2013-06-20 12:19
Maybe someone can help me understand how to track. If the countries within EU, they at least have a framework and in the US it's a single country with autonomous companies abroad which can still be track.
Malaysia, ala submarine, 4 sub companies found outside and to trace , there is no framework. If they use the French proceeding to help unweil the companies then what?
For your info Bernake took the decision against the establish economist opinion. The action is not wrong simply because he sees from many angle.
2013-06-20 12:20
Someone needs to do a Bill Clinton in US. Bite the bullet. Obama is only serving Jewish interests! <ducking now! Brickbats coming! LoL>
2013-06-20 12:25
My opinion of the bond buying, is buying time.
Well remember Einstein quote below
Insanity: doing the same thing over and over again and expecting different results.
Albert Einstein
What they were earlier doing is starting the engine over and over again and hoping it will start using all the old material and oil and etc. this was what the economist recommended.
Let see now.....a real kick in must have at least majority key indicator starting to show positive or maybe new indicators.
Don't forget their market and Europe got into this also becoz they are the leader in derivatives and futures.
2013-06-20 12:28
Well .. maybe! Can see dark cloud or overhang in the 2013 horizon for now! Thanks Bernanke! :)
2013-06-20 12:59
Kerbau M'sia just meet Green light and ramp up throttle,suddenly in front have traffic jam hais....
2013-06-20 13:20
Hustle's description is spot on ... Poor retail investors, hold back so long, ready to go, now stuck with traffic jam + haze some more.
2013-06-20 13:27
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has to be done because US equity market is growing at a rate difficult to comprehend now. probably Bernanke's way of slowing down the bullish sentiments without inviting hyperinflation later.
2013-06-20 11:08