Post FOMC: Stay engaged in risk assets
- The Fed cut policy rate by 25 bps in latest FOMC meeting; Chairman Powell striking a hawkish tone
- This signals the end of policy easing, for now
- The 3Q19 US earnings season is trending positively led by Technology
- Our analysis suggests that the bond market has overpriced US recession risk
- Recent market developments are positive for the outlook of risk assets
Federal Reserve’s “hawkish” rate cut and positive US earnings season. In October’s Federal Open Market Committee (FOMC) meeting, the Federal Reserve cut the Fed funds rate by 25 bps, as expected. This brings total cumulative rates cut to 75 bps in the current mini-easing cycle. Fed Chair Jerome Powell struck a hawkish tone in his latest statement, signalling the end of policy easing, for now.
On the corporate front, the US’s third quarter earnings season continues to progress steadily with c.80% of the companies reporting positive earnings surprises (vs 76% in 2Q19), led by Technology. Despite frequent talks that the positive US earnings is due to shares buyback, data suggest otherwise. To nullify the “impact” of buybacks, we look at the proportion of companies reporting topline revenue growth instead – it is positive at c.71% in 3Q (vs 66% in 2Q19).
What does this mean?
Inflection Point: Steepening yield curve and positive earnings are constructive for risk assets. Back in August, the inversion of US Treasury (UST) 2s/10s yield curve triggered concerns over a broad-based recession. In CIO Perspectives: Yield curve inversion – Much ado about nothing?, we argued that the yield curve has lost its predictive power as the long-end has been artificially suppressed by quantitative easing measures and weak bond yields outside the US.
More importantly, we believe that the bonds market has overpriced US recession risks as the US-China trade war lingers. This is evident in Figure 1, which shows US global cyclicals vs non-cyclicals and the UST 10-year yield. The UST 10-year yield has currently overshot the former (on the downside) and a similar occurrence in mid-2012 saw the 10-year yield rebounding sharply after.
In any case, the yield curve has since widened from -0.79 bps back in end-August to the current level of 15.23 bps. A steepening yield curve points to rising confidence in the domestic US economy. And despite the recent softness in US manufacturing (partly as a result of trade concerns), we expect domestic consumption to stay resilient given the robust job market and stable consumer confidence.
What should you do?
Maintain Overweight stance in US equities. We have adopted an Overweight stance on US equities since the start of 2018 and our view remains unchanged. The sectors we favour are Technology, Communication Services, Health Care, Real Estate, Energy, and Consumer Staples.
Click here to download the PDF.
This information herein is published by DBS Bank Ltd. (“DBS Bank”) and is for information only. This publication is intended for DBS Bank and its subsidiaries or affiliates (collectively “DBS”) and clients to whom it has been delivered and may not be reproduced, transmitted or communicated to any other person without the prior written permission of DBS Bank.
This publication is not and does not constitute or form part of any offer, recommendation, invitation or solicitation to you to subscribe to or to enter into any transaction as described, nor is it calculated to invite or permit the making of offers to the public to subscribe to or enter into any transaction for cash or other consideration and should not be viewed as such.
The information herein may be incomplete or condensed and it may not include a number of terms and provisions nor does it identify or define all or any of the risks associated to any actual transaction. Any terms, conditions and opinions contained herein may have been obtained from various sources and neither DBS nor any of their respective directors or employees (collectively the “DBS Group”) make any warranty, expressed or implied, as to its accuracy or completeness and thus assume no responsibility of it. The information herein may be subject to further revision, verification and updating and DBS Group undertakes no responsibility thereof.
All figures and amounts stated are for illustration purposes only and shall not bind DBS Group. This publication does not have regard to the specific investment objectives, financial situation or particular needs of any specific person. Before entering into any transaction to purchase any product mentioned in this publication, you should take steps to ensure that you understand the transaction and has made an independent assessment of the appropriateness of the transaction in light of your own objectives and circumstances. In particular, you should read all the relevant documentation pertaining to the product and may wish to seek advice from a financial or other professional adviser or make such independent investigations as you consider necessary or appropriate for such purposes. If you choose not to do so, you should consider carefully whether any product mentioned in this publication is suitable for you. DBS Group does not act as an adviser and assumes no fiduciary responsibility or liability for any consequences, financial or otherwise, arising from any arrangement or entrance into any transaction in reliance on the information contained herein. In order to build your own independent analysis of any transaction and its consequences, you should consult your own independent financial, accounting, tax, legal or other competent professional advisors as you deem appropriate to ensure that any assessment you make is suitable for you in light of your own financial, accounting, tax, and legal constraints and objectives without relying in any way on DBS Group or any position which DBS Group might have expressed in this document or orally to you in the discussion.
If this publication has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or omissions in the contents of the Information, which may arise as a result of electronic transmission. If verification is required, please request for a hard-copy version.
This publication is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.
Singapore: This publication is distributed by DBS Bank Ltd (Company Regn. No. 196800306E) ("DBS") which is an Exempt Financial Adviser as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore (the "MAS").