...but some are not convinced of a soft landing

KUALA LUMPUR (July 29): Indication of slower pace of fed funds rate (FFR) increases by the US Federal Reserve on Wednesday pointed to a lower recession risk, and subsequently a calmer equities market at least until September, analysts said.

The Fed had raised the interest rates by 75 basis points (bps) for a second time this year to the 2.25%-2.5% target range. Fed Chairman Jerome Powell warned that a third similar hike may take place in September if inflation persists, with a year-end range of 3%-3.5%.

Given that the latest 75bps hike in the FFR had been priced in earlier, the markets staged a relief rally overnight on indication of a possible slower pace of rate hike by the Fed.

Global shares rose on Wednesday (July 27) after the US Fed’s announcement, with the Nasdaq posting its biggest single-day jump of 4.06% since April 2020.

At home, the FBM KLCI settled 1.39% higher, with all but one sector indices in the green, led by Energy Index (3.32%) and telecommunications and multimedia (1.78%). The Healthcare Index, however, slipped 0.22%.

The improved market sentiment is further supported by Powell’s remark that he does not think the US economy is in a recession.

Areca Capital Sdn Bhd CEO Danny Wong, when contacted, said that “there is a chance for a less aggressive stance as inflation may peak”.

“I believe that the 75bps hike, and not 100bps [as some forecasted], along with the “could go slow” tone somewhat eases concerns of overly aggressive policy — [which means] lower risk of recession.

“With a lower recession risk and the global border reopening, the domestic (Malaysian) economy will have better prospects,” Wong said. 

“Then the market looks more positive — maybe not broadly, but selectively,” he added.

MIDF Research head Imran Yassin Md Yusof when contacted by The Edge, said: “We believe it will be a trading market until the next FOMC (Federal Open Market Committee) meeting (in September).

“Should the market [reduce the pace of the hike as market expected], it will calm the markets further. This will be positive and we expect our market will return to an upward trajectory towards the end of the year,” Imran said.

 A fund manager sees comments by Powell indicating a view by the US Fed that the inflationary environment “is no longer a runaway train”.

“The market should be better behaved in the near term, at least until inflation spikes, if any, from geopolitical changes like the Ukraine war worsening,” the fund manager said.

“Instead, they have had negotiations like the opening of the Ukraine port for grain exports, for example. If inflation turns south, then things will get calmer,” the fund manager added.

Another head of research has a stronger view. “I would say the market is either close or at the bottom. Economic recession risks have reduced significantly,” he said, describing his takeaway from the US Fed action and comments.

Indeed, some see a pause in rate hikes in 2023 and a downward reversal in 2024, when the US Fed is once again ahead of the inflation curve, which would be positive for risk assets.

A slowdown in rate hikes may impact the US dollar’s rally, and give countries like Malaysia a chance to address the gap between Fed rates and the local overnight policy rate (OPR) to entice foreign investments.

Still, some quarters are not convinced of a better economic outlook from here on out. 

One view refers to slowing sales growth, coupled with how GDP is currently supported by higher-than-expected inventories stockpiling, which would slow in the coming quarters. Companies such as in retail and semiconductor are also suggesting slower sales, moving forward.

Others highlighted that the US general merchandise inventory-to-sales ratio surged to 1.58 times in April and May, and above the 2011-2019 average of 1.44, according to the US Census Bureau data. 

Further, the advanced estimate for US 2Q2022 GDP forecast on July 28 came in at a 0.9% contraction, below consensus expectations of 0.5% growth, US Department of Commerce data showed. 

Morgan Stanley Wealth Management Chief Investment Officer Lisa Shalett, in a July 25 report, opined that it is “premature” to think that the bear market is over.

“Interest rates are apt to rise further. The Fed’s policy rate remains more than three percentage points below inflation, per the core personal consumption expenditures (PCE) index. Over the past 50 years or so, it has been incredibly rare for the Fed to hold its policy rate below this inflation gauge for any prolonged period.”

Nomura Global Markets Research, in a note, said that US stocks "have never bottomed ahead of a recession" in the past 12 US recessions, but during — or after, once.

The research house, which anticipates 3.5%-3.75% FFR by end-2022, coupled with a US recession in 4Q22-4Q23, suggests that investors “may have to wait longer” for a sustained recovery in stocks.