Overnight, the US Federal Reserve’s Open Market Committee hiked by 25bps, taking the Fed funds rate ceiling to 5%, but softened the statement tone to “some additional policy firming may be appropriate”, compared to “ongoing increases in the target range will be appropriate” in the previous statement. The tone Fed Chair Powell struck appears balanced given heightened uncertainties on banking sector stability. Note that yields headed sharply lower (2Y down by 23bps and 10Y down by 17bps) as there have been some expectations that the Fed may raise the terminal rate in the dotplot. To be fair, the Fed did raise its core PCE projection to 3.6% for 2023, a tad higher than the 3.5% it projected in December. However, the 2023 GDP estimate was also shifted modestly lower to 0.4%, from 0.5% previously. The dotplot was left unchanged at 5.1% for 2023 and a touch higher at 4.3% in 2024.
Given volatile swings in yields, we are cautious in extrapolating the rally in US Treasuries too far. We would also note that the market shift from “higher for longer” into “cuts: sooner or later” has been outsized as the terminal rate pricing got shaved by some 75-100bps. The market is now pricing in about 70bps of cuts (from peak) by the end of the year and a cumulative 200bps of cuts by end-2024. From the market’s perspective, it makes sense to keep a premium on UST as banking sector/recession worries now dominate inflation/rate hike woes. Broadly, we think rate cuts this year are plausible (not our core view) if the banking sector does not stabilize. Between funds drawn down from the discount facility and funds moving into the reverse repo facility, it is clear that high short-term rates are placing considerable stresses on the financial system. A shift back into neutral (3.5-4.0%) and a wider deposit guarantee would go a long way towards allaying these worries. Accordingly, there are meaningful risks that the Fed would downshift towards neutral (from restrictive) earlier than we expect. However, beyond a certain yield level, this insurance looks expensive. Short of a deep recession, we are not convinced that the extent of cuts priced is warranted. Strategy wise, we generally still like to keep a steepening bias in both the 2Y/10Y and 5Y/30Y segments of the USD curve.
Topic
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR
Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply. The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.