Overnight, the Federal Open Market Committee cut by 25bps, taking the Fed funds rate to 4.75%. While Fed Chair Powell sounded balanced at this point, we note that USD rates have been taking on fairly hawkish hues. Between resilient data and upside risks from Trump’s upcoming policies, the Fed’s SEP forecasts in September feels dated even as Fed Chair Powell indicated that the US elections would have no impact on the Fed in the short term. Instead, the focus would be on the policies that gets announced (a more reactive stance than a pro-active stance). While there are still six more weeks to the next FOMC meeting (where new Fed forecasts and dot-plot will be available), we reckon that the environment has shifted and have revised our USD rates (together with SGD and HKD rates) higher over the coming two years.
We had cautioned that the selloff in USTs may have been overdone and the market, having cleared the event risks (US elections and FOMC meeting) of the week, agrees. The UST curve bull flattened with 10Y yields down by 10bps for the day. To be sure, yields are still a lot higher than they were compared to just six weeks ago. Trump’s victory with the increasing likelihood of fiscal looseness and more tariffs have changed the equation. 10Y yields would probably be trading in the 4-4.5% range in the near term, reflecting optimism for growth and higher inflation expectations. That said, Trump’s inauguration is still several weeks away (20 January). Expectations are high that he would deliver on his campaign promises. Accordingly, there could be room for disappointment if some policies get diluted / delayed. Market participants may also have a less rosy take on sentiment if tariffs lead to escalating trade war across the globe.
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