No more US Fed hints: How Warsh could change the way Singapore analysts read markets

SINGAPORE – Since the US Federal Reserve shifted to a less transparent policy approach, CMC Markets sales trader Eugene Koh has been paying much closer attention to key macroeconomic indicators, such as non-farm payrolls and inflation, to gauge the direction of monetary policy.

“These indicators provide valuable insight into how the Fed may approach monetary policy going forward,” said Koh.

One interesting change following the Fed shift is that market reactions have become much more nuanced, he added.

For example, a weaker-than-expected non-farm payrolls report – a key measure of US employment growth – would traditionally be viewed as bearish, as it signals a slowing economy.

However, in the current environment, traders also consider whether softer economic data could increase the likelihood of future rate cuts, which can support equities and other risk assets, he noted.

“As a result, the key question is no longer just whether the data is good or bad, but what it means for the Fed’s next move.”

Koh’s comments come after new Fed chairman Kevin Warsh abolished forward guidance. Under his leadership, the US central bank aims to adopt a less predictable communication style, making it harder for Wall Street to guess future interest rate moves.

The Fed kept interest rates steady at 3.5 per cent to 3.75 per cent during Warsh’s first policy meeting in June, driven by persistent inflation.

Before Warsh assumed the role, the Fed practised “forward guidance”. This meant it communicated its expectations for the economy and the likely path of interest rates. Warsh, however, argues that this excessive communication creates an environment where the market expects too much from the Fed and can lead investors to treat its projections as firm commitments rather than conditional guidance.

Koh said his conversations with clients have now become much more macro-driven.

“Clients are increasingly seeking guidance on how economic releases and Fed expectations could affect their portfolios, so staying on top of these developments helps me better translate market moves into client takeaways, and makes it an even more important part of my day-to-day workflow,” he said.

Analysts said the absence of forward guidance will likely put significant additional weight on key economic data in shaping market expectations of Fed policy, especially inflation data.

For example, if inflation in May is higher than both what economists expected and what the Fed projected, investors will likely believe the central bank needs to raise interest rates sooner than expected, said UOB senior economist Alvin Liew.

Every inflation and jobs report now carries the weight that the Fed’s projections used to carry, said Koh. But uncertainty mounts too, and investors could demand higher yields to compensate for policy uncertainty, he noted.

“Markets don’t stop guessing what the Fed will do just because the Fed stops guiding. Investors will comb speeches and regional Fed comments for the signal the statement no longer gives. This makes it harder to read, not easier,” he said.

Investors will demand a little extra yield to hold short-term bonds, for example, when they are unsure how Warsh will act, Koh added.

RHB Singapore head of equity research Shekhar Jaiswal said the impact is multifaceted for Singapore equities as the Republic’s market is heavily weighted towards banks and real estate investment trusts (REITs) – both of which are highly rate-sensitive but in opposite directions.

The Singapore banking sector, which forms the bulk of the Straits Times Index’s market capitalisation, generally benefits from a stable interest rate environment or expectations of higher rates, as net interest margins remain supported. In contrast, REITs tend to come under pressure when markets anticipate rate hikes, as higher borrowing costs weigh on the sector.

But with RHB’s base case of interest rates remaining on hold, the rate environment should remain supportive of both sectors – with banks continuing to benefit from elevated net interest margins while REITs avoid additional pressure from higher borrowing costs.

Even as the Fed shifts, analysts and investors are expected to adjust accordingly.

An RHB research analyst said that while analysts and investors do take banks’ guidance and projections into account, they also weigh other information to reach a decision, including in-house economist views and forecasts, as well as consensus expectations.

“Hence, we expect analysts and investors to adjust to these changes, and the implications shouldn’t be too significant,” the analyst added.

Jaiswal noted that while the shift in Fed communication does not change how RHB approaches Singapore equity research, it sharpens the importance of the rigorous, model-driven analysis that the bank’s economics team relies upon.

RHB group chief economist Barnabas Gan said that economic analysis continues to stay forward-looking, with best efforts to look past the noise and anticipate globally realistic assumptions and backdrop. “We continue to augment our models to include new data to give credible interest and economic forecasts,” he added.