Watching the Fed

With China away in the coming week for Lunar New Year celebrations, what would investors focus on in the interim?

US Federal Reserve
Source: Bloomberg

Fed-watching rises to the top of the list of activities. The string of soft US data and global market volatility (mainly point south) have pared back expectations of further US rate hikes, widening the yawning gap between market pricing and Fed projections.

For now, it is a foregone conclusion that the Fed would raise interest rates in the March meeting, where fed fund futures market showed an implied probability of just 10%! Even the likelihood of another rate hike by the end of 2016 fell below 50%, compared to over 90% at the end of last year.

What’s worrying the markets is some Fed policymakers’ belief that recent developments are not sufficiently serious or persistent to warrant a material change in the central bank’s outlook and view on the gradual path of the rate hike cycle. The expectations disparity will heighten market volatility. The weak investor sentiments at the start of the year have room to continue for a few more weeks.

Market players will place their focus, once again, on Fed-speak, to assess and dissect the meaning between the lines.

Next week, Fed chair Janet Yellen will deliver the semi-annual monetary policy report before the Senate Banking Committee. Her statement would be keenly watched. A couple of Fed Presidents would also be speaking – New York’s Dudley and San Francisco’s Williams.

US data would also be monitored, particularly retail sales, to gauge the strength of US growth. Higher importance will be accorded if the non-farm payroll data significantly underwhelm the consensus of 190,000.

Although China markets are shut for the week, there is still a couple of data which would stoke interest. Foreign reserves, which have recently been in the spotlight as an indicator for capital outflows, will be reported on Sunday, 7 February.

Analysts expect another fall to the tune around $120 billion to $3.21 trillion from $3.33 trillion previously. Moreover, aggregate financing, new yuan loans and money supply data may be released within 10-15 February.

US corporate earnings would continue, and should continue to show weak profits. Over 60% of S&P 500 companies have reported so far, with the aggregate growth in sales and earnings in negative. Tellingly, defensive sectors are seeing positive sales and earnings growth, including health care, telecommunications and consumer services. Needless to say, oil & gas, and basic materials fared the worst, given the worldwide commodity slump.



The USD retreat has provided some respite to global oil prices, although it is mainly optimism about a potential special OPEC meeting to discuss output cuts that fuelled the rebound. Nonetheless, the optimism went as quickly as it came.

Without the support of Saudi Arabia and Iran, the mooted extraordinary meeting is very unlikely to take place. Even if it does, it would be suicidal for the OPEC members who are open to the idea of cutting production to actually do so. Non-compliant OPEC members and non-OPEC producers will simply fill the void with more output, thereby gaining market share.

This seems to set the stage for a renewed decline in oil prices, perhaps a stronger break of the $30 barrier. The OPEC monthly oil report and US EIA weekly report (both on 10 February) could be potential triggers, although I feel a stronger impetus is necessary to push crude lower.



Singapore markets will be closed for Chinese New Year on 8-9 February, and corporate earnings will resume thereafter. Singtel, SATS and ComfortDelgro will be releasing their quarterly earnings report on Friday, 12 February.

The Straits Times Index have seen a strong rebound today, pulled up by a surge in Singtel shares, presumably positioning plays ahead of the long weekend. Gains in SGX, SIA, and Noble also helped the rally. The STI regained above 2600 as of 3pm on Friday, 5 February, though still far erasing the 10% year-to-date losses.


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