SET must brace for corrections as rate hike trend looms
The US Federal Open Market Committee (FOMC) decided at its meeting this month to leave its benchmark federal funds rate unchanged at 0.25 per cent to 0.50 per cent.
Although it came as a surprise to us, the Fed chairman later signalled after the meeting that the rate is likely to rise later this year.
At the recent meeting, three Fed members – the most in two years – voted for a rate rise. Interestingly, although the other three Fed members voted for the rate to remain unchanged, they wanted to see the benchmark rate increase in the future. Only three wanted the Fed to maintain the rate in the long term.
The Fed Fund Futures indicates higher probability at 61 per cent for the US rate hike in December and that is in line with Bloomberg’s survey. Based on the survey, 48 out of 59 economists (81 per cent) forecast the Fed to hike the rate in December.
According to Dot Plot, most Fed members are expected to see the US rate at 0.625 per cent in 2016, 1.125 per cent in 2017, 1.875 per cent in 2018, 2.625 per cent in 2019 and 2.875 per cent in the long term. The previous prediction was 0.875 per cent in 2016, 1.625 per cent in 2017, 2.375 per cent in 2018 and 3 per cent in the long term.
That means the Fed is estimated to raise its rate once this year and twice a year for the next three years. Previously, the US central bank was projected to hike its rate three times a year.
We see the Fed’s move to not raise the rate this time, but with room for a future increase in the rest of this year, as a signal for markets to get prepared for an upward trend in interest rates.
Such behaviour is similar to that in late 2015 when the Fed postponed its rate hike at its September meeting.
The Dow Jones Industrial Average positively responded only on the first day of that meeting, advancing 0.87 per cent. However, the Dow Jones dropped by 4.6 per cent for two consecutive weeks. The situation was the same at the October 2015 meeting. After the Fed kept the rate unchanged, the Dow Jones rose 2 per cent for one week before concerns rose of a possible rate hike in the December meeting. Such concerns dragged down the Dow Jones index more than 4 per cent in the next two weeks. After the December meeting, the Fed decided to raise its rate by 25 basis points. Despite a 1.3-per-cent increase, the Dow Jones fell more than 3.5 per cent in the next two days and slid 4.2 per cent in one month.
Given the Fed’s warning of an upward rate trend and the results of the European Central Bank and Bank of Japan meetings, low interest rate policy or negative rate policy is coming to an end.
The world is stepping into the upward rate trend. From now on, more market fluctuations are expected. The SET Index remains at risk of capital outflows with sharp market corrections, particularly when the FOMC’s December meeting approaches. We maintain our SET Index target for the year-end at 1,530 points.
