To The Moon

75 Bps Hike.

The Federal Open Market Committee (FOMC) concluded on 15 June and as expected, interest rate on the upper range of Fed Fund rate was raised by 75bps to 1.75%. This is the largest since 1994 in a bid to ease runaway inflation which came in at 8.6% yoy in May 22.

Many have argued that the Fed have been extremely late in the curve last year in addressing that inflation by considering that it was largely transitory.

However, it is proved that inflation is stickier than previously thought given the supply side issues have been further exacerbated by on-going supply chain disruptions and the geopolitical crisis between Russia and Ukraine.

The Fed continue to guide July’s FOMC rates increase in the range of 50-75bps and forecast a 3.25%-3.5% by end of 2022.

Some impacts may bring to Sigapore as below: 

1. Higher borrowing cost.

Singapore households with high levels of debt maybe pressured in a rising interest rate environment as they seek to reprice their loans. Mortgage costs in Singapore as reference by the new Singapore Overnight Rate Average (SORA) may increase in conjunction, albeit not at the same pace and on a “backward”-looking basis along with higher US interest rates. Singapore household debt accounted for 66% of Singapore’s nominal GDP in March 2022 a level higher than pre-pandemic levels given the backdrop of strong real-estate market the last year. Undoubtedly, this may influence household’s purchase decision of housing in 2022, which have already seen slower take-up this year.

2. Slower Forward Growth.

Given that interest rate is the cost of borrowing money and rate of return for saving; a high cost of fund typically results in a contraction in economic activity with higher cost of borrowing and higher propensity to save. Ministry of Trade and Industry (MTI) expects that Singapore GDP to grow in the lower half of the 3.0% to 5.0% forecast as global external economic environment have been slower.

Singapore GDP YoY (%)

3. Inflation High Against Historical.

Singapore government does not use interest rates however it uses exchange rate policies by in a tightening stance to tackle inflation and since April, it has re-centered the Nominal Effective Exchange Rate S$NEER and increased the appreciation of the policy band of the SGD in April. This was considering Monetary Association of Singapore (MAS) guidance of overall CPI for All Items to come in 2ppts higher than earlier range to 4.5% to 5.5%. Consumers is expected to focus more on daily necessities as compared to discretionary, as rising costs particularly affect the low to middle income groups.

SG CPI All Items YoY (%)

4. STI in Positive Territory.

Amid global stock market drawdown, the Straits Times Index (STI) have still maintained +1.2% total return given a bigger representation of the index to bank stocks which have tailwinds of higher interest rates benefiting net interest margins. It also has a good exposure of reopening stocks in the tourism sector and real estate investment trust managers. Not to mention a smaller weight in the information technology sector, which tends to underperform during a high interest rate environment, as longer duration cash flows are discounted at higher discounts rates.

Straits Times Index (STI)

$Straits Times Index(STI.SI)$ ,$STI ETF(ES3.SI)$ ,$SINGAPORE AIRLINES LTD(C6L.SI)$ ,$DBS GROUP HOLDINGS LTD(D05.SI)$ ,$KEPPEL REIT(K71U.SI)$ ,$IREIT GLOBAL(UD1U.SI)$