Fed Rates on Hold – How Will This Affect Singapore Savers And Borrowers?

Economic

Summary:

Experts explain what to consider for home loans, and why interest rates for savings accounts fell ahead of the Fed cutting rates.

Interest rates in the United States could stay unchanged because inflation has not improved enough.

US Federal Reserve chairman Jerome Powell said it would likely take longer than previously expected to gain the "greater confidence" needed to start cutting rates.

Singapore's interest rates are determined by global rates and foreign exchange market expectations. That means broadly following the direction of other central banks, especially the US Fed.

So will savings accounts' interest rates stay high?

Not necessarily, according to experts.

UOB and Standard Chartered Bank have already lowered the interest rates on their flagship savings accounts.

Banks make interest payments to those who deposit funds with them, and earn interest income from those who borrow money from them.

Some banks have more money than their customers want to borrow, which means they are not earning much interest income.

"They have challenges lending all this money out, because property transactions have slowed down," said Mr Alfred Chia, chief executive officer of the SingCapital financial advisory.

"At the same time they have to fork out high interest payments."

So banks that lower interest rates may be trying to reduce costs.

And as rates in the US stay high for longer, banks could continue to face the issue of having more funds than they can loan out, said Mr Chia.

But specifically for UOB, the decision to cut rates may not be due to the Fed or market expectations, said Mr Glenn Thum, senior research analyst at Phillip Securities Research.

It may instead be that the bank increased rates "too aggressively at the start", he said.

Will fixed deposit rates increase then?

These have already fallen and are not likely to rise despite the Fed standing still.

"We won't see the promotional interest rates that we saw previously last year. That's when everyone was rushing to a bank," said Mr Thum. "I don't think we'll see that because of the uncertainty."

Banks would rather not risk raising rates since they are unsure of when the Fed will move.

When yields on Treasury bills – debt securities issued and backed by the Singapore government – rose in 2022, banks had to respond and increase their fixed deposit rates, said Mr Chia of SingCapital.

But these have since declined and reached a mostly stable point. They are unlikely to be too affected by the latest news from the Fed, he added.

Local banks are offering rates of between 2.7 per cent and 2.9 per cent for six-month fixed deposits, though OCBC requires a larger deposit amount than DBS and UOB, according to their websites.

What about home loan rates?

Mortgages pegged to the Singapore Overnight Rate Average (SORA) will be more impacted by the Fed, said Mr Chia.

In Singapore, a floating home loan rate is usually pegged to SORA. The interest rates vary throughout the life of the loan, depending on the economy and market conditions.

"Home mortgage rates have actually started to stabilise, some have actually (seen) some form of drop," said Mr Chia, adding that fixed-rate packages could be around 1 percentage point lower.

According to the PropertyGuru portal, DBS offers a two-year fixed package at 2.9 per cent. The three-month compounded SORA on May 2 was 3.6491 per cent.

Mr Song Seng Wun, economic advisor at CGS-CIMB Securities, said that on the whole, he expects interest rates in Singapore to continue hovering around current levels.

But potential borrowers should also keep shopping around.

"Rates have peaked," he said. "But some places are willing to lend to you at a lower rate than others."

When will the Fed adjust rates?

Opinions are divided.

Mr Chia and Mr Thum see up to three rate cuts closer to the end of the year, depending on how stubborn inflation is and other economic indicators such as the labour market.

But other observers believe the Fed is unlikely to cut rates this year, despite expectations.

Mr Kurt Mayell, head of trading platform CMC Markets Singapore, pointed to strong productivity, wages and employment numbers – which impact the Fed's decisions on rate adjustments.

Robust economic data could in fact revive rate hike fears, though Mr Powell said on Thursday this was unlikely.

Macroeconomic consultant Komal Sri-Kumar said the US presidential election in November could affect the Fed's decisions.

"(Powell's) statement that he does not expect a rate increase is also in some sense politically motivated, because he could not say that rates could go up and then crash the markets during the months before the elections," said Mr Komal.

Mr Lee Kian Soon, CEO of fund management firm Astral Asset Management, said one consequence of little to no rate cuts this year would be a huge interest rate differential.

"In the short term, governments could take some measures or actions to try to calm the markets," he said.

"But, over the longer run this is difficult unless they raise interest rates to narrow the gaps.

"It's very difficult for most Asian central banks as they depend on the actions triggered by the Fed to decide what is best for their economies and currencies."

Source: CNA

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ING

Economic

Not a terrible report, but clear signs of softening

So maybe Fed Chair Powell did get an early look at the jobs report given his dovish leaning press conference on Wednesday. Non-farm payrolls rose 175k in April versus the 240k consensus (ranged between 145k and 280k in the Bloomberg survey) and there were 22k of downward revisions to the past couple of months. The unemployment rate moves up to 3.9% from 3.8% while wage growth was softer than expected at 0.2% month-on-month, bringing the annual rate of growth to 3.9%, the slowest rate since June 2021. Rounding out the key numbers we also see the average work week dropped to 34.3 hours from 34.4.

None of this is terrible – it really isn’t a 'bad' report – but it is the first time we have seen every part of the report come in weaker than expected for a very, very long time. Consequently, the market is fully discounting a 25bp September interest rate cut once again with a second one before the end of the year. Only 28bp of rate cuts were priced for 2024 as a whole just ahead of Wednesday's FOMC meeting.

Monthly change in US non-farm payrolls (000s)

Weaker US Job Numbers Boost Expectations of a September Rate Cut_1

More weakness is on its way if labour surveys are to be believed

Looking at the details in the report we see that private education and healthcare services continues to be the main engine of job creation – contributing 95k of the 175k total, but leisure & hospitality (5k) and government (8k) are much weaker than has usually been the case over the past 18 months. Meanwhile the household survey, which is used to calculate the unemployment rate, showed employment rising only 25k with the number of people classifying themselves as unemployed rising 63k. The outlook for the jobs market isn’t great with the ISM employment surveys and the National Federation of Independent Business hiring intentions series all pointing to further moderation in job creation through the summer.

Surveys point to further weakness in job creation to come

Weaker US Job Numbers Boost Expectations of a September Rate Cut_2

A September rate cut looks a strong call again

Given this situation we are sticking with our September Federal Reserve interest rate cut call. To deliver it we think we need at least three 0.2% or below MoM core inflation prints and the unemployment rate getting above 4% with a little bit more evidence of softening consumer spending growth. All of that is possible over the next five months and the Federal Reserve appears to want to cut if the data allows them – they don’t want to cause a recession if they can avoid it. However, once the momentum swings in an economy things can turn nasty and we expect them to follow up with rate cuts in November and December as well.

Source: ING

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Cohen

Economic

Central Bank

Forex

Japan appears to have bought some time and respite for a tumbling yen through its latest bursts of suspected interventions, yet it has also set itself up for a protracted war with a market that views the currency as a compelling sell, analysts say.

Traders estimate the Bank of Japan (BOJ) spent nearly $59 billion defending the currency this week, helping to put the yen on track for its best weekly performance in over a year.

The Japanese currency is up 5% from the 34-year low of 160.245 it plumbed on Monday. Tokyo is yet to confirm it had intervened.

But this week's rally has been anything but linear in a market decidedly bearish on the currency, given the massive gap between its ultra-low yields and those in other major economies.

The yen has swung wildly during the suspected intervention bouts, gaining nearly 5 yen in a matter of minutes and relinquishing part of that speedily.

"Nothing's actually changed," said Rob Carnell, head of Asia-Pacific research at ING. "I think this has provided a momentary pause in what will inevitably be tested by markets again, who will see this as free money when they take on the BOJ...."

Carnell says the yen has become "a trader's dream", as they can make easy money by simply buying dollars for yen, waiting for the pair to rise and then selling it as the BOJ steps in to support the yen.

"You'd be mad not to test it, knowing that they will step in at some stage," he said.

Before this week's suspected forays into the market, Japanese authorities last intervened between September and October in 2022 spending around $60 billion to defend the currency.

The yen was then near 152 per dollar, but within two months of that intervention it was sliding again. It had shed 20% more of its value against the greenback when it hit 1990 lows this week.

"Because of the wide rate differentials, speculators will still be on the other side of this trade," said Kaspar Hense, a senior portfolio manager at BlueBay Asset Management.

The spread between the benchmark 10-year U.S. Treasury and Japanese government bond yields is nearly 4 percentage points.

No Targets

Ben Bennett, Asia-Pacific investment strategist at Legal And General Investment Management, says Japan's Ministry of Finance, whose mandate it is to manage the yen, is well aware of how monetary settings are stacked against the yen and is only acting to contain the pace of depreciation.

"Intervention comes at a cost, and I think the MOF would be unwilling to throw money at a specific target," he said.

Even after the BOJ's landmark move away from negative rates in March, the yen remains the cheapest major currency to borrow and short-sell, sealing its fate.

Analysts say that complicates forecasts for the yen, but it appears like the 160 level is one the BOJ wants to protect.

Hirofumi Suzuki, chief currency strategist at Sumitomo Mitsui Banking Corporation in Tokyo, reckons Japanese authorities find the decline after their March meeting "speculative and unacceptable" and might be aiming to get the yen back to 155 to a dollar where it was before that momentous policy decision.

Yujiro Goto, head of currency strategy for Japan at Nomura, feels the authorities merely want to help their importers get the dollars they need.

"I think 150 is ideal for Japanese importers. I think around the 152–152.50 level is probably what MOF wanted to have, but it didn't hit that level, so there is a risk that MOF might come back for another round."

Speculators also realise that the government's war chest isn't bottomless. Japan has about $1.3 trillion in currency reserves, but only around $155 billion that it holds in dollar deposits are liquid.

Meanwhile, Federal Reserve rate cut bets are receding as the U.S. economy and labour markets stay hot. Speculative short yen positions have run up to their largest in 17 years.

Fred Neumann, chief Asia economist at HSBC, says Japan is only trying to end the asymmetric one-sided speculation, rather than defend any yen levels.

"Given the reality of higher U.S. interest rates for longer, this is an expectations management exercise. It's not an exercise to necessarily deliver a rapid appreciation of the yen," he said.

($1 = 152.8600 yen)

Source: Reuters

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Economic

Central Bank

BoE - No rate cuts yet

Britain's economy seems to have escaped the shallow recession it fell into last year, and has finally entered the recovery phase. Business surveys point to solid growth in the first quarter and even stronger momentum in the second quarter, powered by a rebound in consumer spending as wage growth has remained resilient.

The dark side of this economic resurgence is that inflation remains persistently hot. The core CPI rate held above 4% in March and business surveys warn of a reacceleration in the coming months as companies lift their prices to pass rising costs onto consumers.

In this light, the Bank of England is unlikely to signal any imminent rate cuts when it concludes its meeting on Thursday, reflecting the stubbornness of inflationary pressures. Of course, that wouldn't be surprising for investors, who currently expect the first rate cut to be delivered in August.

A message that rate cuts are still some distance away could benefit the pound, although the broader FX reaction will also depend on the new economic forecasts and the vote composition of the Committee. A single member voted for an immediate cut last time, but given the recent string of encouraging data, this official could also vote for keeping rates unchanged this time. BoE and RBA Decisions Headline a Calm Week_1

BoE and RBA Decisions Headline a Calm Week_1

In the big picture, the outlook for the British pound seems cautiously optimistic. While sterling has lost about 1.5% against the mighty US dollar this year, it has gained a similar amount against the euro, and almost 7% against the sinking Japanese yen. Therefore, expectations of higher-for-longer rates have supported sterling, even if it hasn't shown up against the dollar.

Another element that has supported the pound has been the risk-on tone in equity markets, given its strong correlation with global risk sentiment. Assuming these factors remain in force, the currency could continue to shine, at least against the euro and yen.

Beyond the BoE meeting, the nation's GDP numbers for the first quarter are out on Friday, and will likely show that economic growth flipped positive after a minor contraction late last year.

RBA unlikely to rock the boat

Crossing into Australia, the Reserve Bank will wrap up its own meeting early on Tuesday. No action is expected, and judging by incoming economic data, policymakers are unlikely to change their neutral tone either.

Consumer and producer inflation came in hotter than expected in the first quarter, signaling that the path for bringing inflation back down might be slower than the central bank had anticipated. The strength in the labor market reinforces this notion, alongside the rapid increases in house prices. BoE and RBA Decisions Headline a Calm Week_2

BoE and RBA Decisions Headline a Calm Week_2

Similarly, there have been some early signs of recovery in China's industrial sector, which is great news for Australia, whose entire business model relies on shipping its commodity exports to China. Over time, this can help boost Australian growth.

Blending everything together, there is no reason for the RBA to deviate from its neutral stance at this meeting. If anything, it could strike a slightly more hawkish tone, but is unlikely to go as far as to signal another rate increase.

A neutral message on rates would leave the Australian dollar mostly in the hands of global risk appetite and any China developments. In this sense, China's latest trade numbers on Thursday could be crucial for the currency.

Bank of Japan releases summary of opinions

Over in Japan, the government has intervened in the FX market to buy the sinking yen, propelling the currency more than 3% higher this week. That said, the fundamental factors that pushed the yen to its lowest levels in three decades are still present, raising questions about the sustainability of this recovery.

BoE and RBA Decisions Headline a Calm Week_3

For the yen to enjoy a proper trend reversal, interest rate differentials need to narrow - either with the Fed cutting rates or with the Bank of Japan raising them. Neither seems likely over the next few months, which suggests the yen could remain under pressure overall, although FX interventions might help ensure it doesn't hit new lows.

The Bank of Japan will release the summary of opinions from its April meeting on Thursday, which will provide some clues around the potential timing of the next rate increase, alongside the latest batch of national wage numbers.

Finally in Canada, employment stats for April will hit the markets on Friday.

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Warren Takunda

Central Bank

Economic

The Bank's next interest rate decision is next Thursday. Interest rates will be kept unchanged at 5.25%, but economists expect it to signal impending rate cuts.

This is a clear risk to the Pound given the market is not prepared for early cuts. In fact, money market pricing shows the investment community is only really prepared for a first cut in August.

Volatility in Pound exchange rates is likely as there remains a great deal of uncertainty as to when the Bank of England will proceed with interest rate cuts due to the widely divergent set of views on the matter amongst the Bank's policy setting committee.

Some, such as Governor Andrew Bailey and Dave Ramsden appear keen to cut soon, while others such as Chief Economist Huw Pill and Megan Greene have recently indicated they would prefer to wait. Catherine Mann and Jonathan Haskel are certainly not yet ready to entertain cuts, if their recent comments on the matter are anything to go by.

"Having voted as a bloc in recent years, the five internal members appear less united than before. Several days after Ramsden's surprisingly dovish speech, Huw Pill struck a markedly more hawkish tone, suggesting the monetary policy outlook hadn't changed since his previous speech, when he had said that rate cuts were "some way off," says Andrew Goodwin, Chief UK Economist at Oxford Economics.

Robert Howard, a Reuters market analyst, says if there is to be a rate cut in June, it will likely be delivered by the narrowest of margins, 5-4, with chief economist Huw Pill and "external" hawks Megan Greene, Jonathan Haskel and Catherine Mann opposed.

Pound to Euro Rate Can Fall to 1.1650 as Bank of England Set to Signal Imminent Rate Cuts_1

Above: GBP/EUR at daily intervals.

The European Central Bank (ECB) is set to cut interest rates in June, but such a decision would hardly shake the Euro given it has long been expected. The Federal Reserve is expected to cut later in the year owing to strong U.S. economic data.

"The BoE's outlook appears somewhat more uncertain, as the MPC has seemingly become more divided over the need for early rate cuts," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

This means there will be 'new news' on the UK rate outlook next Thursday, and 'new news' can move currency markets.

With market pricing not fully accounting for a potential June interest rate rise, we would anticipate that expectations can move in this direction. Expect this to pressure UK bond yields relative to those in the Eurozone and U.S., which will weigh on the Pound.

"We expect the Monetary Policy Committee to reiterate that rate cuts are coming soon," says Goodwin.

He says whether the cut comes in June or August is a close call, and the extent to which market pricing responds could be key.

"In the hiking cycle, the MPC showed a reluctance to go against market expectations. So if markets remain hawkish, the MPC is likely to err on the side of caution and wait until August," he explains.

This uncertainty should ultimately mean any Pound-Euro weakness is ultimately contained, with the prospect of an August hike likely to see support maintained.

The Pound to Euro exchange rate could, therefore, test the lower end of the 2024 range (1.1650) in the event that Thursday's decision is a 'dovish' one before it tests the topside again if developments in subsequent weeks point to an August rate cut.

Source: Poundsterlinglive

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Warren Takunda

Central Bank

Economic

The U.S. non-farm payroll presents the first major test for the Dollar of May, and already markets are expecting another strong print as the economy extends a strong start to the the year.

The consensus expectation is for 240k new jobs, and Antje Praefcke, FX Analyst at Commerzbank, says a higher result could support the dollar again.

"At the same time, however, we have repeatedly pointed out that it is becoming increasingly difficult for the dollar to benefit from good figures, as a much later cut in the key interest rate is already priced in," she adds.

The incidentally the highest consensus forecast since September 2022 and the 4th consecutive increase in NFP expectations

The Dollar is 2024's top-performing G10 currency thanks to the slashing of expectations for U.S. interest rate cuts. The markets started the year betting on 150 basis points of cuts, but they are now only fully priced for one cut in December. This represents a significant pushback in rate cut bets already.

With a host of other central banks set to cut rates before the Fed, the divergence in interest rate policy must grow if the Dollar is to rally to fresh highs, particularly given the 'long' USD trade is significantly bloated.

"We think that any disappointments from the NFP or ISM today could be seen as more consequential for the overbought USD than any upside surprises," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole. "The USD further remains the biggest long in G10 FX according to our positioning data and could be vulnerable to positioning squeeze in the near term."

Job Report Sets a High Bar for USD, Pound to Dollar Rate Can Extend Near-term Recovery_1

Above: GBP/USD recovers within the context of the 2024 decline. Too early to call an end to the selloff.

Paul Robson, G10 currency analyst at NatWest, says the market is clearly positioned for this divergence, as well as for a continuation of US economic and USD dominance. "That naturally ups the ante for US economic data to outperform a seemingly ever-rising bar."

Robson says the Dollar may need fuel from a strong April data cycle to extend further; "we aren’t confident that upcoming US data will meet that standard."

"The bar is already high - and rising - for large data surprises," says a weekly FX strategy note from Barclays.

Researchers say strong job reports have generated a smaller repricing of Fed expectations than inflation releases. Nevertheless, they have offered clear signals of U.S. economic outperformance, which, according to Barclays analysis, has been the dominant factor behind USD outperformance.

Job Report Sets a High Bar for USD, Pound to Dollar Rate Can Extend Near-term Recovery_2

So while the Dollar rally might be on hold, the pro-USD thesis remains very much alive, and it will take a series of disappointing data prints to suggest U.S. outperformance is over.

Until then, near-term Pound-Dollar strength will likely be viewed as temporary, with risks still pointed lower.

Source: Poundsterlinglive

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Warren Takunda

Economic

Cryptocurrency

Bitcoin faces major resistance, which is keeping the BTC price rebound below $60,000.

While recovering up to 6.2% from this week’s lows, BTC/USD has not managed to break through key trendlines, data from Cointelegraph Markets Pro and TradingView confirms.

Moving average threatens BTC price "ordeal”

Bitcoin saw a 23% pullback from all-time highs through April and into May, and so far, the odds of a return to BTC price discovery remain low.

As Cointelegraph reported, Arthur Hayes, former CEO of crypto exchange BitMEX, expects rangebound trading below $70,000 to characterize BTC/USD through August.

First, however, $60,000 must be reclaimed, and so far, the trendlines guarding it are winning out over bulls.

On the radar is Bitcoin’s 100-day moving average (MA), currently at $59,930 as of May 3.

This trendline has acted as market support since October 2023 and provided a floor through the first half of 2023’s Bitcoin bull market.

Now, however, the price is printing full daily candles below it. Bitcoin Price Is Failing to Break These 2 Key Resistance Lines at $60,000 _1

BTC/USD 1-day chart with 100 SMA. Source: TradingView

Commenting on the phenomenon, trading resource Material Indicators agreed that bulls were “running into strong technical resistance at the 100-Day MA.”

An accompanying chart showed one of Material Indicators’ proprietary trading tools flashing green on daily timeframes.

“Reclaiming the 100-Day Moving Average would be a big deal for Bitcoin Bulls that could lead to a short squeeze,” co-founder Keith Alan continued in a post on X.

“A rejection would be an ordeal.”

Bitcoin short-term holders underwater

Another BTC price hurdle to clear on the road to recovery is a classic bull market support line — the short-term holder realized price (STH-RP).

This refers to the aggregate cost basis of more speculative Bitcoin hodlers — wallets storing BTC for 155 days or less.

When the price returns to STH-RP — which occurred multiple times in recent weeks — it can act as solid support, as it did for much of the bull market since early 2023.

STH-RP sat at $59,684 on May 1, the latest date for which figures are available on the on-chain data resource Look Into Bitcoin. Bitcoin Price Is Failing to Break These 2 Key Resistance Lines at $60,000 _2

Bitcoin Price Is Failing to Break These 2 Key Resistance Lines at $60,000 _2

Bitcoin STH-RP chart. Source: Look Into Bitcoin

The metric thus forms another key trendline concentrated within close proximity to $60,000.

In his latest X commentary, Caleb Franzen, CEO of Cubic Analysts, included STH-RP in his own selection of resistance levels to clear.

“My personal line in the sand for ‘risk-on’ is a daily close above $61k. Lots of work to do,” he concluded. Bitcoin Price Is Failing to Break These 2 Key Resistance Lines at $60,000 _3