Rate Hikes Have Reached A Crescendo
While the next two rate hikes will be steep, at 75bp on 2 Nov 22 and 50bp on 14 Dec 22, 4Q22 could be the last quarter of pain as the intensity of rate hikes is expected to be modest in 2023. We like hospitality and retail REITs as reopening plays and logistics and data centre REITs as new economy plays. Our bottom-up and diversified BUY picks are ART (Target: S$1.29), FCT (Target: S$2.56), LREIT (Target: S$0.91), MINT (Target: S$3.12) and MLT (Target: S$1.94). Maintain OVERWEIGHT.
• Ferocious rate hikes almost reaching a climax. The Fed has maintained its disciplined and hawkish stance and hiked the Fed Funds Rate by a third consecutive 75bp to 3.00% after the FOMC meeting on 21 Sep 22. Based on the Fed’s dot plot, the median projected path for Fed Funds Rate would hit 4.4% by end-22 and 4.6% by end-23. The projection is expected to lead to continued steep rate hikes on of 75bp on 2 Nov 22 and 50bp on 14 Dec 22, bringing the Fed Funds Rate to 4.25 by end-22. The rate hikes are front-loaded in 2022 and the intensity of rate hikes is expected to be modest in 2023.
• Anticipating pain but striving to engineer a soft landing. The Fed is concerned that inflation remains elevated, driven by imbalances between demand and supply. It prioritises quelling inflation and has promised to “keep at it until the job is done.” Based on economic projections submitted by FOMC participants, GDP growth is expected to slow to 1.2% and unemployment rate should rise to 4.4% in 2023.
• An inverted yield curve foreshadows risk of a potential US recession. Inflation has moderated but at a stubbornly slow pace. The US yield curve has flattened in 1H22 but inverted in 3Q22. Yield for 2Y US government bond shot up by 125bp in 3Q22, outpacing the increase of 67bp for 10Y US government bond. The 10Y–2Y term spread has turned negative since Jul 22 and is currently -0.52%. The current short-end of the yield curve implies forward short-term interest rates at 4.0% for 1Y, 4.5% for 2Y and 4.3% for 3Y, indicating a possibility of rate cuts in 2024.
• US recession is not inevitable. The strong labour market increases the likelihood of a soft landing for the US economy. The unemployment rate inched higher by 0.2ppt mom to 3.7% in Aug 22, near a 50-year low. Companies added 315,000 non-farm jobs, while average hourly earnings grew 4.4% yoy. There are currently 1.8 job openings for every unemployed worker. The strong labour market supports domestic consumption, which accounts for 68% of US GDP.