A report by CYS Global Remit Strategic Sales Management Team
Fed’s Early Christmas Present | skip to SGD/CNY
Last week, the Federal Reserve sent its clearest signal yet that its historic, most aggressive policy tightening cycle is over, pencilling in three expected rate cuts in 2024. That sparked a wild rally, one of the largest post-Fed meeting gains in recent memory.
Fed officials unanimously agreed to keep the target range for the benchmark federal funds rate at 5.25%-5.5%, still maintaining the highest level in 22 years, in line with market expectations.
Rallying in financial markets is happening almost everywhere. Global stocks soared and short-term U.S. Treasuries had their best day since March. World currencies soared against the USD and corporate bonds rebounded.
Emotions were running high among traders, who essentially interpreted that Jerome Powell had succeeded in his mission to keep inflation slowing in a still-expanding business cycle.
There's certainly no guarantee last week's rally will continue. The market has poured into bets on interest rate cuts countless times in the past two years, but often the result is that the Fed remains nuanced in their message. This time, investors are caught off guard.
Few on Wall Street seemed concerned about potential unexpected inflation or employment data altering the course of traders in the coming months. Despite the clear possibility of such shifts, particularly in U.S. markets, it's evident that these concerns weren't resonating deeply.
The dot plot indicates a potential conclusion to the current cycle of interest rate hikes, hinting at the possibility of three rate cuts in the upcoming year. Since March 2022, the Federal Reserve has executed a series of cumulative interest rate increases, totaling 525 basis points. Notably, the U.S. inflation rate soared to a four-decade high during this period.
As we stepped into the second half of 2023, the Federal Reserve slowed down its interest rate hikes. However, the central bank maintained a focus on ensuring a continuous decline in inflation rates toward the 2% target level. Fed Chair Powell emphasized this commitment, stating, “While we believe that policy rates are likely to be at or near the peak of this tightening cycle, economic conditions since the epidemic have surprised forecasters in many ways.” He further added that the Fed was ready to tighten policy further if deemed necessary for progress toward their 2% inflation target.
Former New York Fed President William Dudley remarked on Powell’s speech, noting that it added fuel to the already heated market. Powell acknowledged the lag in monetary policy but highlighted that financial conditions were considerably looser than a few months ago.
An interesting observation is the timeline of events. At the beginning of the month, Powell was expressing a "higher for longer" sentiment, only to backtrack two weeks later and suggest three rate cuts for the next year. This shift was followed by New York Fed President William pushing back on expectations of March rate cuts within 48 hours. This sequence underscores how interest rate policy language can influence the markets, even when skepticism remains about the timing of announcements.
The notable change is the Fed's reduced concern about stronger growth and an increased appreciation for the decline in inflation. The Fed recognizes that inflation has come down, and their data-dependency now leans more toward inflation than growth. The focus has shifted from fearing stronger growth to acknowledging that inflation can decrease even with robust economic growth.
The market was surprised by the explicit discussion of rate cuts by the Fed, offering some assurance and allowing the market to move further. The Fed has communicated that they are done with rate hikes, achieving their goals related to inflation. This appears to be a strategic move to align more closely with market expectations and avoid causing a recession by keeping rates high for an extended period.
The crucial question now is when the Fed will initiate rate cuts. While the market anticipates March 2024, it might be premature to conclude a rate cut by then. The actual cut could be on the table in May 2024, with potential risks triggering earlier cuts if labour markets deteriorate rapidly or if inflation data falls short.
In previous market insights, we emphasized the need for Fed officials to introduce "rate cuts" in their interest rate policy language to support the soft USD profile. This shift, happening earlier than anticipated, marks a significant moment for the markets and serves as an early Christmas present from the Fed. With a dovish pivot displacing the higher-for-longer narrative, we can anticipate Asia currencies regaining strength against the greenback.
China’s Property Support
The world’s second-largest economy sluggish property sector continues to face challenges in reviving positive sentiments. From January to November, real estate development investment plunged by 9.4% y/y, while the housing construction area of real estate development enterprises was 8,313 million square meters, a y/y decrease of 7.2%. 1
The area of newly started housing construction was 5,853 million square meters, a decrease of 7.6% y/y. Among them, the area of newly started residential construction was 874.56 million square meters, a decrease of 21.2% y/y.
The real estate sector is a pillar industry for the Chinese economy, and it plays a very large role in China's GDP. Policymakers in Beijing introduced bolder property measures last week, as a counterweight to the dismal economic prints entrenched in its property industry.
Last Friday, Beijing and Shanghai successively issued new policies for the property market, both of which included differentiated adjustments to the down payment ratios for first and second homes as well as reductions in mortgage interest rates. Beijing and Shanghai are widely touted to be the “strongest bellwethers” of China’s property market. This is another major move by first-tier cities after Shenzhen lowered the down payment ratio last month in November.
The minimum down payment ratio for personal housing loans for first homes in Beijing (including personal commercial housing loans and personal housing provident fund Loans) has been reduced to 30%. The minimum down payment ratio for personal housing loans for second homes is lowered to 50% in the six urban districts (Dongcheng, Xicheng, Chaoyang, Haidian, Fengtai, Shijingshan District) and 40% in the six non-urban districts.
On the same day, Shanghai also announced they will optimize differentiated housing credit policies starting from December 15. The minimum down payment ratio for the first home is adjusted to no less than 30%, and the minimum down payment ratio for the second home is adjusted to no less than 50%. In addition, in the Lin-gang New Area of the Free Trade Zone and the six administrative regions of Jiading, Qingpu, Songjiang, Fengxian, Baoshan and Jinshan, the minimum down payment ratio for second homes has been adjusted to no less than 40%.
For those who just need to buy a house, the biggest problems are the down payment ratio and the subsequent repayment cost. The new announcement by policymakers is expected to alleviate both problems.
“By lowering the threshold for home purchase, more people with purchasing power will be encouraged to enter the market. This also increases the sale of second-hand houses and new houses and alleviates the expectations of owners and developers to sell houses at reduced prices, thus slowing down the trend of increased listings of second-hand houses.
At the same time, it promotes real estate transactions, alleviates the capital chain breaks of developers, and achieves the dual purposes of preventing risks and stabilizing growth,” Li Yujia, chief researcher of the Housing Policy Research Center of the Guangdong Provincial Urban Planning Institute, pointed out.1
After 2016, despite the sharp rise in housing prices, China's real estate market has not experienced a significant increase in the proportion of investment. The residential sales area in 70 large and medium-sized cities has remained roughly unchanged. This is significantly different from most real estate bubbles. The key reason behind this may be the sudden tightening of land supply during this period.
The dramatic rise in housing prices in big cities has squeezed some demand into small and medium-sized cities, bringing prosperity to the real estate market in small and medium-sized cities.
The impact of the epidemic has caused damage to the balance sheets of local governments, enterprises, and ordinary households. Coupled with geopolitical uncertainty and some industry-specific regulatory policies, the risk-taking willingness and ability of households and corporate sectors have significantly declined. It appears that these damages are more severe and last longer in larger cities.
In the context of the rapid decline in demand in the real estate market, due to the inherent fragility of the high turnover model, strict pre-sale fund supervision, and deleveraging policies, widespread liquidity risks have emerged in the real estate industry, which in turn has amplified the decline in demand and hurts the entire industry. Economic and financial systems are under increasing pressure.
Since the beginning of this year, in the context of the relaxation of the epidemic and economic recovery, one of the main factors that has exerted a significant drag on the economy undoubtedly comes from the real estate market. Until now, the performance of various data in the real estate market is still unsatisfactory. Despite the new measures, some sceptics remain unconvinced as to how much and how far it can go to “resuscitate” its beleaguered property sector.
Our view remains that the downturn in China’s real estate industry is inevitable, and demographic trends will determine this. We see that there can only be ways to ensure that it does not decline too quickly. A longer-term solution is to rebalance the economy toward more consumption-led growth.
We have always maintained our take that improvement in economic fundamentals is crucial to revive investors’ risk-on sentiments, and encourage foreign fund flows back into the world’s second-largest economy. For now, a weaker USD (due to the Fed’s explicit pivot towards cuts in 2024) will continue the continued strengthening of the RMB. A further decline toward the psychological key 7 level before year-end remains on the cards. The recent RMB exchange rate has returned to the appreciation channel, mainly due to the continuous decline of the USD index and changes in market expectations.
At present, the market has judged that the U.S. interest rate hike cycle is over and will choose a looser policy to support the U.S. economy. The USD index has continued to fall, and the yields on 10-year treasury bonds in China and the U.S. interest rate spreads continue to narrow. Additionally, year-end is typically the seasonal peak of foreign exchange settlement. As the demand for RMB exchange settlement increases, the RMB exchange rate is expected to rebound strongly.
Looking forward, as the unilateral strong trend of the USD index against non-U.S. currencies comes to an end, and with strong support from the steady recovery of domestic economic fundamentals, the RMB exchange rate will gradually rise back to a reasonable price range consistent with the currency value.
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