PETALING JAYA: Perhaps reflective of the changing mood that has emerged in the first quarter of the year (1Q24), expert observers are tuning down their optimism about US Federal Reserve (Fed) rate cuts in 2024.
Unsurprisingly, the shift comes as recent data releases have moderated market expectations of lower rates, with the Fed is now being anticipated to maintain its restrictive policy for a longer period.
MIDF Research said that while the change in policy direction may not have an immediate impact to the Malaysian economy, the research house is adamant that any decisions by the Fed will have global repercussions, an idea that should be gaining traction with investors worldwide.
Notably, the research house began the year by forecasting three rate cuts to begin from the second half of 2024 (2H24), but now believes the latest developments dictate pulling back on that projection, revising it to the possibility of one cut, possibly occurring in 4Q24.
“However, despite this we believe that the underlying premise for our outlook remains unchanged, albeit with some tweaks to our expectations for currencies and the Malaysian Government Securities (MGS) market,” it said in a note to clients yesterday.
Zooming in further on Malaysia, Centre for Market Education (CME) chief executive Carmelo Ferlito said Bank Negara should keep its policy decisions based on its own evaluations.
“Undoubtedly, Bank Negara’s decisions will always be influenced by the international scenario, but it is more affected by domestic economic conditions,” he told StarBiz.
Additionally, due to the general strength of the US dollar, Ferlito does not see any Fed rate increase, although he is not confident there will be any rate cuts over the short term unless international tensions deteriorate to the extent that a push for even more accommodative policy become necessary.
MIDF Research’s predictions resonate with chief investment officer at Tradeview Capital Nixon Wong, who said that given the persistent inflation, driven primarily by high home and energy prices, the likelihood of prices remaining elevated is now higher.
He said due to the threat of geopolitical tensions, it is even less probable at present to see a retreat in the prices of energy, while recognising that the fluidity and data-dependent nature of the situation has brought about adjustments to the forecasts of many analysts.
Looking at matters from the perspective of Malaysian investments, he nevertheless thinks it is likely that Bank Negara’s overnight policy rate (OPR) will remain unchanged for the remainder of the year.
“This expectation is supported by our healthy economic growth driven by local factors and relatively controlled inflation, although it could be subject to adjustment following the rationalisation of subsidies.
“Additionally, our weak currency position does not leave much room for a downward revision of interest rates,” he said.
Based on this scenario, he expects fund flows to continue favouring the United States due to the ongoing strength of the greenback, should the Fed keep rates as they are.
On the flipside, if the Fed decides to lower rates, it may signal a slowdown in the US economy, prompting fund flows to shift towards relatively higher-yielding countries like Malaysia and benefiting the broader Asia region, including local equities, said Wong.
Should the Fed rate be reduced, he added that local equities are therefore poised to perform well, on top of a possible synchronised rally in bonds, since bond prices typically move inversely to interest rates.
“Meanwhile, the property sector’s performance is likely to be more influenced by domestic policies such as increases in housing permits and the Malaysia My Second Home (MM2H) policy, rather than macroeconomic factors,” Wong said.
Likewise, despite conceding it remains a waiting game for the Fed to deliver its much expected rate cuts, MIDF Research is keeping its FBM KLCI target for 2024 at 1,665 points.
“We are sanguine on Malaysia’s economic prospects, and we maintain our expectation of the earnings growth potential of corporate Malaysia,” it said.
The research house’s optimism is underpinned by an anticipated recovery in external trade for Malaysia, the prospect of an upside in the construction sector following the 12th Malaysian Plan Mid-Term Review, as well as an improving outlook for the property sector, should the OPR remain unchanged.
However, it cautioned that if the Fed decides to keep its rate status quo until year-end, the much-anticipated reversal of fund flows into the emerging markets will be further delayed.
On the other hand, with the OPR widely expected to remain steady for the rest of the year, MIDF Research is not predicting a significant deviation in the ringgit’s performance from the current level at year-end although it will mark the fourth consecutive year of depreciation.
