Ahead Today
G3: FOMC Decision
Asia: Singapore COE Premium
Market Highlights
It is Fed decision day, and the jobs for central banks remains harder with the difficult trade-off between rising oil prices and uncertainty around the fog of the implications of the Iran war, coupled with local dynamics amongst each central banks. In this meeting, the Fed will probably lean towards the dictum of doing no harm rather than making huge changes at this point, both because it cannot predict what will happen in Iran, and also because there are signs that the US labour market on the other hand is weakening more than expected perhaps in part driven by AI. In addition, changes in the personnel in the Fed not least upcoming Chair with Kevin Warsh the nominee to replace Powell would also argue for keeping some optionality for now.
The broader picture we find ourselves in is that rates markets have repriced across global and Asian central banks since the Iran war, and perhaps for good reasons. Yesterday’s decision by the Reserve Bank of Australia to hike rates by 25bps was one good example, and highlights how the starting point of inflation and domestic macro setting is also key to the path moving forward. The decision was initially taken by the market as a split one with a 5-4 vote for a hike, but RBA Governor Bullock’s subsequent press statement seems hawkish suggesting that members were debating “when” rather than “whether” to hike rates during the meeting.
Meanwhile, Bank Indonesia kept rates on hold at 4.75%, but in the policy statement it said that it will maintain interest rates for the time being while removing references to interest rate cuts. BI Governor Perry Warjiyo also said that the central bank will need to anticipate and address the Iran war’s spillovers to sustain growth momentum. Overall, the message seems to be somewhat less dovish from BI, focusing on price and Rupiah stability for now given the difficulty in forecasting the impact of the Iran war. For Indonesia’s case, although it is a net commodity exporter and could benefit if commodity prices including coal and palm oil rise more generally, one big macro risk factor stems from the fiscal side if oil prices were to continue rising given existing fuel subsidies. If the government were forced to hike domestic fuel prices at some point to reduce fuel subsidies, this could also result in a weaker Rupiah and/or higher interest rate structure all things equal. We maintain our view for underperformance in IDR FX and bonds.
Separately, the Philippines central bank and Finance Secretary said that rate hikes may be considered if oil price increases and disruptions persist, with the BSP monitoring the severity and persistence due to the Iran war. Finance Secretary Frederick Go said that if the Iran war will be short term, the effect on Philippine GDP growth could be less than 10bps, but the impact will be more pronounced if war lasts more than six months. Meanwhile, he also said that as long as currency movements are smooth and not abrupt, he is not too concerned about PHP’s weakness against the dollar, and that he is also asking agencies to delay non-essential capital outlay.