Hang Seng Bank Senior Economist Thomas Tsang said the Federal Reserve kept interest rates unchanged as the market expected. However, the voting results showed that three officials cast dissenting votes and advocated a 25 basis point rate hike. This is the first time since 2016 that three officials have cast dissenting votes in the same direction, reflecting growing support within the Fed for raising rates. Although Fed Chair Warsh reiterated the authority's 2% inflation target, he did not provide a clear signal on the future direction of interest rates, and market expectations for a near-term Fed rate hike therefore edged lower. Recently released inflation data show signs that underlying inflation pressures in the United States are easing, with rising energy prices still having limited impact on the prices of other goods or services, supporting the Fed's decision to stay put. On the other hand, long-term US Treasury yields have risen significantly, already cooling the economy to some extent. Unless underlying inflation pressures rise markedly, the Fed is expected to remain inclined to keep rates unchanged to avoid further aggravating downside risks to the economy.
Hang Seng Bank Chief Investment Director of Wealth Management Leung Kwan-fei said the Fed kept rates unchanged at 3.5% to 3.75%, but three regional Fed bank presidents cast dissenting votes and advocated a rate hike, reflecting that with US inflation above the 2% target for five consecutive years, more policymakers are leaning toward tightening monetary policy. The latest interest rate futures show traders see the probability of an October rate hike at close to 90%. After the rate decision, the 30-year US Treasury yield rose to 5.2%, and has climbed 36 basis points so far in July, hitting a 19-year high. The higher the cost of funds, the higher the risk premium, and US stocks have also come under pressure along with US Treasuries. At the same time, market concerns about heavy spending by major US cloud services technology giants persist, and the technology sector remains one of the main factors dragging on the broader market.
Leung Kwan-fei noted that stocks and bonds should be kept in a diversified allocation. On the bond side, the bank emphasizes duration management and asset diversification. US Treasury yield volatility may persist, so it focuses on short- to medium-duration bonds and floating-rate instruments such as securitized credit debt to reduce interest rate risk, while also deploying into emerging market debt with relatively attractive yields and spreads. On the equity side, valuation reasonableness remains the core investment factor the bank emphasizes, and diversified allocation across global regions and sectors is very important. The bank continues to maintain an overweight position in Asia-Pacific equities overall, capturing the different economic momentum and earnings catalysts across Asia-Pacific markets.
Comments