DBS Treasures Indonesia - Weekly Insight - Week 1 September 2022
09 Sep 2022

Weekly Insight - Week 1 September 2022

Key Points

  • FX: Fed Funds Rate to peak at 4% this year. We expect the DXY to peak in 4Q22 before turning lower in 2023 on Fed pause.

  • Rates: Inflation and inflation fears have peaked. However, transition into peak Fed rhetoric and Fed downshift might have been delayed.

FX: Not fighting the Fed

We have revised our outlook for Fed hikes and the USD. Our chief economist forecasts a third 75 bps hike to 3.25% at the Federal Open Market Committee meeting on 21 September. He sees the Fed Funds Rate peaking higher at 4.0% this year instead of 3.5% previously, and holding at 4.0% throughout 2023. Hence, assuming a soft landing for the US economy, we expect the DXY to peak in 4Q22 before turning lower in 2023 on the Fed pause.

On 7 September, the Fed’s Beige Book and Fed Vice Chair Lael Brainard’s speech should reinforce the Fed’s hawkish message at the Jackson Hole Symposium. Last Friday’s slower US nonfarm payrolls (315k actual vs 526k prior) and higher unemployment rate (3.7% actual vs 3.5% previous) in August will not stop the Fed from lifting rates above the 2-3% neutral range towards a restrictive level of 4% or above by early next year. On 6 September, prices paid in the ISM Services Purchasing Managers’ Index will indicate whether Consumer Price Index inflation on 13 September will result in a third 75 bps hike on 21 September.

Figure 1: To peak in 4Q22

Figure 1: To peak in 4Q22

Rates: 4% terminal ahead

We have adjusted our USD, SGD, and HKD rates forecasts higher. Over the past week, we noted that US economic data were resilient despite the volatility generated by Fed tightening over the past few months. In accordance with payrolls registering 315k in August, we think that the Fed has sufficient runway to bring the Fed funds rate to 4% (up from 3.5% previously) by the end of the year.

The outlook is nuanced as data confirm the rates pushback against stagflation/recession risks. Aside from firm payrolls, we note that labour force participation has ticked up. This has brought back a welcome supply of labour and could cool off worries about a persistent surge in wages. We also note that forward-looking indicators of inflation (breakevens and commodity prices) point to moderation ahead. This sets up a better macro backdrop of falling inflation and a firm labour market. Accordingly, the 2Y/10Y segment of the curve has steepened accordingly and is now at -20 bps, vs -50 bps several weeks ago. This is in line with our assessment that hard-landing pricing should be faded.

We’ve tweaked our view of the three peaks. We maintain that inflation/inflation fears have peaked. However, the transition into peak Fed rhetoric and Fed downshift might have been delayed a tad. Overall, we still think that June marked peak duration fear. Note that the implied volatility in rates did not quite revisit the high seen in early July. Accordingly, while we did re-centre our USD rates forecasts higher, we kept the 10Y yield forecast just below the 3.5% peak seen in June. An economic slowdown and pause in Fed hikes should herald a subsequent grind in yields.

 

2022F

2023F

US (% pa)

 

 

3M SOFR OIS

3.88

3.88

2Y

3.70

3.40

10Y

3.45

3.30

10Y-2Y

-25

-10

Singapore (% pa)

 

 

3M SOFR OIS

2.98

2.98

2Y

3.00

2.70

10Y

3.15

2.95

10Y-2Y

15

25

HK, SAR (% pa)

 

 

3M HIBOR

3.63

3.63

2Y

3.50

3.20

10Y

3.35

3.20

10Y-2Y

-15

0

Source: DBS

Figure 2: Heading to 4%

Figure 2: Heading to 4%