THAT the US Federal Reserve is open to interest rate cuts despite strong jobs numbers for June indicates that the gloomy global outlook is not improving anytime soon.
While many are factoring in a US “insurance” rate cut of 25 basis points (bps) or 0.25% this month, they are on the lookout for possibly more aggressive rate cuts.
How can Malaysia be impacted?
To a certain extent, these rate cuts leading to a potentially weaker dollar may give some reprieve to the ringgit which would have otherwise weakened.
The ringgit may touch 4.12 against the dollar by year-end, and 4.08 to the dollar by end of 2020, said Maybank Investment Bank.
The local currency hit a three-month high of 4.1090/1120 to the dollar last Friday, on foreign inflows into stocks.
A potential two to three US rate cuts would likely increase interest in foreign-exchange carry trades from which the ringgit could benefit.
The carry trade strategy involves borrowing in currencies where rates are low to invest in places such as emerging markets, where yields are high, with investors profiting from the difference.
These high yielding currencies include the Indonesian rupiah, Indian rupee, Mexican peso and the ringgit.
“However, we should not be too bullish on the ringgit yet, pending the review in September by stock market indices provider FTSE Russell on Malaysia’s position on the World Government Bond Index,” said Hor Kwok Wai, chief operating officer at Hong Leong Bank.
With limited fiscal space even as it revives major infrastructure projects and spends RM45bil on 4,000 development projects this year, Malaysia may focus on monetary policy, a move likely to impact the ringgit.
Barring any strong headwinds, Malaysia is likely to maintain its benchmark overnight policy rate, which was cut recently to 3%.
“But headwinds are strong enough to dent overall confidence and growth, which together with aggressive global monetary easing, should see Malaysia follow the global trend (in easing rates),’’ said Dr Anthony Dass, head of AmBank Research.
In hinting at a potential rate cut, Fed chairman Jerome Powell had cited unresolved trade tensions and concerns over the weak global outlook in his Congressional testimony last week, even as two non-voting Fed presidents still saw the US economy as humming along.
Citing similar concerns, European Central Bank officials also signalled their readiness to add stimulus by cutting rates, with its key rate already at minus 0.4%, and restarting the bond buying programme of 2.6 trillion euros.
Touted to be a strong number, the increase of 224,000 in the US non-farm payrolls in June actually continues on the same trend line of declines in the year-on-year (y-o-y) rise in payrolls, and points to a recession approaching sometime between December 2019 and the middle of 2020.
“The historical record of a first Fed rate cut, following a rate hike cycle, heralding the approach of a recession, remains intact,’’ said Pong Teng Siew, head of research at Inter-Pacific Securities.
Can the situation turn more aggressive? Australia and New Zealand have already cut rates earlier.
China’s exports fell in June by 1.3% y-o-y to US$212.8bil, from a growth of 1.1% in May, as higher US tariffs began to bite.
Imports fell 7.3% in June to US$161.8bil following a decline of 8.5% in May, a further sign of slowing domestic demand.
In the eurozone, industrial production – which includes manufacturing, mining and utilities – grew by 0.9% in May after two consecutive months of decline, but the manufacturing outlook remains sensitive to slower global demand and trade worries.
After several years of average real GDP growth of 2% annually, Germany is expected to grow by only 0.7% by the end of 2019, said the International Monetary Fund.
Singapore’s export-reliant economy saw GDP shrink by an annualised 3.4% in the second quarter from the previous quarter, the biggest drop since 2012.
AmBank Research has placed a 60% chance of a US rate cut of 0.5% this month; more reductions could be in the pipeline with inflation still tame and wage growth, soft.
If the situation turns aggressive, there may be three or four cuts of 0.25% each over the next 12 months, said Danny Wong, CEO at Areca Capital.
Besides rate cuts, large-scale bond purchases by central banks can resume, rebuilding a similar wall of liquidity, as in the 2008 financial crisis following mass injection of stimulus.
This is likely to keep developed markets in an artificial upswing even as they face a likely drop in earnings while liquidity risk, where falling stock prices are not absorbed, is becoming a paramount concern.
Columnist Yap Leng Kuen notes that in times of swift changes, no one should be caught asleep.