Risk-free rates stymied global markets, in particular in the US. The 10-year US treasury yield was at 4.21% on Oct 25, up 58 basis points since Sept 16, just ahead of the Federal Reserve’s 50 basis point Federal Funds Rate cut.
The Fed slashed interest rates by 50 basis points at its September meeting and indicated it would lower rates further by the same amount by year-end. Despite this, the 10Y UST yield has increased sharply, observes Vasu Menon, managing director, investment strategy, OCBC.
“It seems that markets have started to move from worrying about a US recession to worrying that the economy may be too strong — after a string of recent data showed a more resilient economy than many anticipated,” Menon says.
The yield curve has normalised, with the 30-year UST yield at 4.4%, the 10-year at 4.21% and the 2-year at 4.06%.
“Economic data surprises have caused market worries to flip from a hard landing outlook to a no-landing scenario. No landing means that the US economy keeps growing with no meaningful slowdown, inflation proves to be sticky and doesn't reach the Fed's 2% target — making it hard for the Fed to cut rates further or cut rates as much as markets currently anticipate,” Menon reasons.
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Other factors could be at work. “If Trump wins the Presidential election, markets are worried that his fiscal and tax policies could fuel inflation. For one, Trump has talked about imposing hefty tariffs on US imports with the hope of using the revenue from the tariffs to fund significant tax cuts,” Menon says.
Trump has indicated he could cut the corporate tax rate to 15% from the current 21%, and make the tax cuts in his Tax Cuts and Jobs Act in 2017 permanent.
Market watchers including the nonpartisan Committee for a Responsible Federal Budget have stated that Trump’s economic plan would raise the US national debt by US$7.5 trillion due to his tax cuts. That would inevitably put upward pressure on bond yields, raise interest rates, and coupled with more expensive goods from higher tarriffs, turn out to be inflationary. No matter how much Trump loves the stock market as a gauge of his own success, Southeast Asian markets and locally where REITs are major index components, experienced the impact of rising interest rates in the last two and a half years, and it wasn't pretty.
See also: Trumpian future of higher deficits, tariffs, point to inflation and higher interest rates
“It is not clear if Trump will be able to implement the draconian import tariffs he’s talked about, without Congressional approval. If it is taken to Congress, we may see a pushback from politicians, even those from his own party, who may be worried that it could trigger a US recession,” Menon suggests.
Locally, the Straits Times Index (STI) fell by 47 points week-on-week to end at 3,593 on Oct 25. Short-term RSI is easing. Its decline, coupled with high risk-free rates have stymied equity markets. However annual momentum is intact, and the STI has a fighting chance to clear 3,600 decisively, so long as the 3,570 level continues to hold.
