Mar 14, 2016

    Fed hike unlikely 'till June', traders eye Budget

    FOLLOWING the buzz around the European Central Bank's (ECB's) aggressive easing package unveiled last week, market attention will return to the United States this week as the Federal Open Market Committee (FOMC) sits down for its March meeting.

    It is not expected to announce another rate hike after the two-day meeting starting tomorrow but it might drop hints on when it might raise interest rates again.

    The Fed's decision will hinge upon economic data, which has shown conflicting pictures of the health of the US economy. While job creation has remained on a firm track, with 242,000 jobs generated last month, growth has yet to gain pace and core inflation is still off the central bank's 2 per cent target.

    Disruption to financial markets is another concern that might keep the Fed cautious, Barclays senior economist Leong Wai Ho told The Straits Times.

    "I think it will continue to signal its commitment to a rate normalisation path by keeping guidance on timing uncertain," he said.

    "That timing will be conditional upon the strength of the business cycle... (and) financial volatility in the world. The Fed does not want to be seen as a contributor to volatility."

    Still, a hike seems all but certain by the end of June, with another to follow by the year end, said economists polled by Reuters last week.

    Global markets were calm last week ahead of the meeting, as sentiment improved after the ECB's rate cuts and the firming up of oil prices, which recovered to US$40 per barrel.

    Singapore's benchmark Straits Times Index has tracked a U-shape recovery similar to that of oil prices, holding the 2,800 level for the first time in over two months.

    With Japan and China also set for further monetary easing, things are looking up for the regional markets in the second quarter.

    Said DBS analyst Joanne Goh: "We believe that we have sidestepped the worst impact in the first quarter, and investors should start to realise that a global recession is not something to be worried about just yet.

    "We are positive on Asia equities in the second quarter, in anticipation of oil prices to sustain recent gains that would help ease global growth concerns, and of the US Fed holding off any further rate hikes until June."

    Meanwhile, the upcoming Budget announcement on March 24 will stay on local investors' radar, with many likely hoping that the Government will announce some unwinding of property cooling measures.

    NRA Capital said in a recent note: "The STI may be supported during these two weeks as speculation mount as to how the Government is going to stimulate the economy. Briefly, public construction and infocomm technology companies are likely to benefit from higher government spending.

    "There is also chatter that some of the property cooling measures may be lifted, following comments by some developers earlier."

    The prolonged market stagnation at home partly led major developers to pencil in combined net impairment charges of $435 million last year.

    But those with exposure to the China market have benefited from strong sales there and earnings this year will likely reflect a boost.

    Last year, City Developments sold 677 units in Suzhou and 13 villas in Shanghai, while CapitaLand has sold around 65 per cent of the 7,000 homes to be completed this year, Maybank Kim Eng analyst Derrick Heng said.

    He gave both a "buy" call in a note last week.