Heightened Alert For Higher Interest Rates

Interest rates would be on an upcycle after QE Taper is completed by Mar 22. Our analysis indicates that every 100bp rise in 3M SIBOR results in NIM expansion of 25bp for DBS, 13bp for OCBC and 16bp for UOB. We raise our earnings forecasts for DBS and OCBC by 6% and 3% respectively for 2023 and expect earnings growth of 16% and 10% in 2024. BUY DBS (Target: S$40.28) and OCBC (Target: S$16.12) for
2023 dividend yield of 4.5% and 4.8% respectively. Maintain OVERWEIGHT.

WHAT’S NEW

Political dimension of monetary policy. The Biden Administration is vigilant and is focused on taming the trend of rising inflation as a top priority. President Joe Biden launched the supply chain task force in Jun 21. He has also repeatedly stressed the independence of the Fed to manage inflation effectively. Many voters see inflation as the biggest problem confronting the US economy. Democrats are also concerned that high inflation could become a toxic topic during the midterm elections in Nov 22.

Elevated inflation could be prolonged by the Omicron variant. US core Personal Consumption Expenditures (PCE) inflation jumped 2.7ppt yoy to 4.1% in Oct 21, the fastest pace in 30 years, overshooting the Fed’s target of 2.0%. Implied inflation based on five-year Treasury Inflation-Protected Securities (TIPS) rose 1.6ppt yoy to a peak at 3.2% in Nov 21 before receding to 2.7%. The COVID-19 pandemic disrupts supply chains by causing shortage of components, shortage of workers and port congestion. Thus, the emergence of the Omicron variant could continue to disrupt supply chains and prolong the current elevated inflation.

A faster pace of QE Taper. According to the Fed’s chairman Jerome Powell during testimony to the Senate on 30 Nov 21, inflation has become more broad-based and the risk of inflation becoming persistent and entrenched has increased. The Fed has to act to avert a wage-price spiral. In the latest Federal Open Market Committee (FOMC) meeting on 14-15 Dec 21, the Fed has reduced the pace of bond purchases from US$15b to US$30b per month. The accelerated pace of unwinding means that QE Taper would be over by Mar 22.

Interest rates on a gentle upcycle. Based on projections by FOMC participants, the median projected path for Fed funds rate is 0.9% at end-22, 1.6% at end-23 and 2.1% at end-24, which implies three interest rate hikes in 2022, three in 2023 and two in 2024. UOB Global Economics & Markets Research expects 3M Singapore Interbank Offered Rate (SIBOR) and 3M Swap Offer Rate (SOR) to reach 1.15% (+71bp) and 1.10% (+74bp) respectively by end-22.

ACTION

• Maintain OVERWEIGHT. Singaporeans overcame vaccine hesitancy and are well adapted to living with COVID-19 as an endemic. As of 2 Jan 22, 88% of the total population has completed their full regimen and received at least two doses of COVID-19 vaccines, of which 42% have received their booster shots.