One or two hikes? Analysts divided as Fed meets

Singapore

A RATE hike is not expected as the US Federal Open Market Committee (FOMC) meeting draws to a close on Wednesday. However, following slower than expected US economic growth in the first quarter and jitters over a Greek default, analysts are divided over whether there will be one or two hikes this year - each hike being 25 basis points (0.25 percentage point).

The Fed might still raise rates twice in 2015 because this allows for more space to spread increases out later, Julien Seetharamdoo, chief investment strategist of HSBC Global Asset Management, told The Business Times on Tuesday. He expects hikes in September and December, but not in June as he thinks the Fed will want to prepare the ground more.

The Fed cannot wait too long, said Mr Seetharamdoo, who oversees research for the bank's US$440 billion in assets under management and was in Singapore for client meetings.

He said that current interest rates, at emergency low levels, might not be justified. Consumer spending, earnings and the labour market are picking up. "If they wait too long, the danger is that the economy picks up and they have to raise more aggressively. Better to start now and go more gradually," he said.

"If you look at surveys of businesses, they are reporting that it's becoming harder to find suitable workers. In the more skilled segment, there are definite pressures emerging."

Meanwhile, Aneta Markowska, chief US economist at French bank Societe Generale, and Brian Jones, a veteran economist at the bank, are calling for just one hike in 2015.

"We do expect the dots to drift further down and to indicate just one hike this year and four next year, down from two and five respectively," they said in a Monday note.

The "dots" refer to estimates made by Fed officials on where interest rates are likely to be at the end of each year. The projections are published by the Fed each quarter. Median projections by Fed officials in March were for rates to be between 0.5 per cent and 0.75 per cent by end-2015 - two hikes from zero to 0.25 per cent currently.

"We expect (Fed chair Janet Yellen) to downplay the timing of the lift-off and instead to emphasise the gradual pace of the tightening cycle," they said.

To Citi strategists Siddharth Mathur and Gaurav Garg, the implications of this week's Fed meeting have been pushed to the background given the Greek debt crisis.

"With market positioning likely already short US fixed income and somewhat long US dollar, the risk appears to be rising that a dovish tilt from the FOMC could lead to a rally in US fixed income and better sentiment for emerging market assets," they wrote in a Tuesday note.

Mr Seetharamdoo still expects a last-minute compromise on Greece, and is optimistic about Europe's outlook. Meanwhile, the world is in a "not too hot, not too cold" phase, he said. Growth in the US is still balanced out by lower growth elsewhere given slower population growth in developed markets and high debt levels.

"At the same time, we think investors flip between worrying too much about deflation or inflation. The reality is somewhere in between. Most likely, there will be a continuation of a fragile equilibrium: some growth, but not enough to generate strong inflationary pressure, enough to avoid a deflationary environment.

"That's a relatively encouraging environment from an investment point of view."

Given recent volatility, some emerging market currencies are looking potentially undervalued for investors with a medium-term horizon of a few years, he added. The currencies have weakened since "taper tantrums" of two years ago, when the world first fretted over the US Fed scaling down its bond purchases. Attractive currencies could be the Korean won, Taiwan dollar and Indian rupee, said Mr Seetharamdoo.

Within the emerging market equities space, Asia is preferred. North Asian exporters of higher value-added goods such as South Korea and Taiwan, and Singapore to some extent, can benefit from a pick up in the global economy, he said. Sector-wise, cyclicals such as industrials and financials are preferred over defensives, he said.

READ MORE: The Fed will be very careful on rate hikes, but it's about time