US consumer prices rose sharply, MAS tightens on monetary policy, and Singapore GDP slowdown. What do these mean?
If you have been an active investor in the stock market, surprises should be something you are used to.
In fact, economic and earnings surprises are often what drive share price movements.
However, it is not frequent that we see a series of economic surprises over a short period of time.
This just happened with the US consumer prices continuing on its upward climb, MAS tightening on Singapore’s monetary policy, and Singapore reporting weaker than expected economic growth. All within the span of 12 hours.
Let’s dig deeper into each of these developments.
What does this mean?
#1 – US inflation surprise
After months of rising inflation, many investors expected that we might have seen the worst of rising prices, or what many call “peak inflation”.
But the surprise here is that US consumer prices continue to rise very sharply, reaching 9.1% in June. This exceeded market expectations of 8.8%, and the previous month’s increase of 8.6%.
Excluding food and energy, consumer prices rose by 5.9% compared to the previous year.
How does this impact you:
The majority of economists are now expecting the US Fed to raise interest rates by 1.00 percentage point at its upcoming meeting on 27 July.
This is a very significant shift, as up till yesterday more than 90% of economists surveyed were just expecting a 0.75 percentage point increase.
Higher interest rates are likely to put on cap on equity market valuations, as investors park their money in safer assets now generating a higher return.
Likewise, mortgage rates could continue to rise together with the increase in US interest rates.
#2 – MAS tightening surprise
The MAS has tightened Singapore’s monetary policy in an attempt to tame red-hot inflation.
It would re-centre the Singapore dollar trading band, effectively allowing the Singapore dollar to rise against other currencies.
The MAS typically makes such policy decisions twice a year in April and October. Hence when it makes a decision outside of these meetings, it is usually considered big news.
The move came as the MAS raised its full year inflation forecasts.
Core inflation, which excludes private transportation and accommodation costs, is now expected to be 3.0-4.0% this year, from 2-5-3.5% previously.
In fact, MAS has warned that core inflation could exceed 4% in the near term, before easing in 4Q22.
Headline inflation is projected to be 5.0-6.0%, from 4.5-5.5% previously.
The intention of the move is to help “slow the momentum of inflation and ensure medium-term price stability”.
How does this impact you:
Following the announcement, we saw an immediate strengthening of the Singapore dollar against the US Dollar.
The stronger Singapore dollar would help to lower the prices for imported goods and services, some of which are priced in US Dollar.
This could partly help to cushion the impact of rising prices domestically.
#3 – Singapore economic slowdown surprise
Singapore’s GDP was flat in 2Q22 compared to the previous quarter, missing market expectations for a 1% growth.
Compared to the previous year, Singapore’s economy grew by 4.8% in 2Q22.
Across most segments, we have seen a cooling in growth compared to the previous quarter.
For example, manufacturing output rose by just 0.3% compared to the previous quarter, easing from the 6.3% expansion we saw in 4Q21.
The advance GDP estimates are computed largely from data in April and May. We will get a better picture of the extent of the slowdown when the full GDP numbers are out in August.
How does this impact you:
Earlier in May, the Singapore government had said that growth in 2022 will likely come in at the lower half of its 3-5% projected range.
With the disappointment in the 2Q22 growth numbers, there is a higher likelihood that the projections could be revised lower.
So yes, it is quite evident that the macro picture is not as rosy as before, especially with “slowing momentum” in the economy.
Even as the MAS expects growth this year to remain ‘creditable’, we should think about different scenarios when planning our investments and personal finance.
After all, as these surprises have shown us, there remain a great deal of uncertainty in what lies ahead.
What would Beansprout do?
In the near term, we need to adjust ourselves to the reality that global growth is slowing down, and prepare ourselves for sharper interest rate hikes as central banks hike aggressively.
The IMF has warned that the outlook has ‘darkened significantly’, and the MAS has said that “Singapore’s GDP growth is expected to moderate further in 2023.”
Apart from the MAS monetary tightening, the Bank of Canada also raised its interest rates by 1.00 percentage points right after the US CPI report.
On a more positive note, the higher interest rates mean that the yield you might be able to get for some fixed income assets would be going up too.
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