MAS tightens less than expected. Will the Fed slow down on interest rate hikes too?

What happened?

Despite its small size, Singapore is punching above its weight. Both Singapore equities and Singapore Dollar have outperformed strongly against its regional and global peers.

Now, MAS policy is engaging in an early move towards dovish tightening. This could be a sign that a Fed pivot could be coming soon.

Here are my insights:

• Singapore is thriving and outperforming
• Singapore is a safe haven   
• MAS policy could be a harbinger of a Fed pivot

Singapore is thriving and outperforming

A record 302,000 fans attended the F1 Grand Prix in Singapore last month. There are so much foreign visitors that the average hotel rates exceeded a historical high of S$440 per night for previous F1 periods. Residential rentals continue to surge. Car prices are incredibly high. Cafes and restaurants are packed. Singapore is clearly the place to be.

Singapore’s thriving economy is reflected in the strong relative performance of its equities and currency.

For Singapore equities, the total return is 1% this year, outperforming the negative returns for other major equity indices. Also, the Singapore Dollar has appreciated against all G10 currencies and Asian currencies.

Singapore is a safe haven  

Robust capital flows into both Singapore equities and currency have resulted in its strong outperformance. This strength indicates that Singapore is a safe haven for investors.

Singapore has benefited from the woes of others. Restrictive COVID measures and geopolitical tensions have hurt many Asia countries. Singapore is a shelter against all these concerns.

In April, Singapore is the first major economy in Asia to remove all restrictions for fully vaccinated travelers entering the country. In contrast, key gateway cities such as Tokyo and Seoul only lifted its pandemic restrictions this month. Worse still, Shanghai recently reimposed strict Covid measures. In Hong Kong, 14-day quarantine arrangements for inbound travellers are still necessary.

Singapore is also free from the geopolitical tensions plaguing other countries. In contrast, South Korea, Japan and Taiwan are facing geopolitical tensions which could easily upend the economies of these countries.

MAS policy could be a harbinger of a Fed pivot

Today, MAS announced the tightening of its monetary policy for the fifth time. This is a dovish tightening as it only re-centre the currency band, but did not change the slope and width of the exchange rate policy band. This contrasts against expectations that MAS will re-center and apply a steeper gradient to the currency band.

MAS warned that “downside risks have intensified”. The health of the global economy is a concern that needs to be weighed together with the fight against inflation. Tightening too aggressively will be detrimental in a slowing economy.

The US Fed is on an aggressive rate hike cycle to fight inflation. This has created a strain in the global economy.  The heavy drop in both equities and bonds markets have resulted in investors pining for a Fed pivot.

In October last year, MAS was one of the earliest central banks to move against inflation with tightening of monetary policy. Subsequently, a month later, US Fed Chair Powell unexpectedly announced that the Fed will likely act more quickly to phase out its ultra-low-interest rate policies due to higher inflation.

This time round, MAS is making an early move with a pivot towards dovish tightening. This could be a harbinger for a possible Fed pivot in the coming months.

The article is contributed by EdNeverSlumber. You can read more of his investment insights on his substack.