Thursday, April 28, 2011

FOMC Statement 27 April 2011

# The FOMC concluded that both the economic and labour market recovery is proceeding at a gradual and moderate pace. However, the FOMC acknowledged that the housing sector continues to be depressed.

# The FOMC expected increases in energy and commodity prices to be transitory and anticipated a gradual return to higher levels of resource utilization in a context of price stability.

# Consequently, the Fed will be maintaining its stimulus policy by completing QE2 by June and reinvesting the principal payments from its securities holdings.

# The FOMC anticipated that the federal funds rate will remain at “low levels for an extended period”.

# The FOMC statement is largely in line with the market and our expectations that the QE programme will be maintained. The FOMC did not even touch on the unwinding process, which lends support to our view that unwinding of QE will be delayed until early 2012.

# The implications from the FOMC statement are:
i) Export sector of emerging economies (incl. Malaysia) will still benefit from the gradual improvement in the US;

ii) Global liquidity will still remain ample after QE2 completion. So long as liquidity is available at current gigantic scale, any downside risk of correction to any market will be limited. On the local bourse, we remain positive with unchanged year-end FBM KLCI target of 1,720 (15x 2012 earnings);

iii) Commodity prices will stay high. Central banks in the Asia region may have to stay hawkish to fight inflation. We maintain our view that the OPR will be hiked 25bps in the MPC meeting next week;

iv) Risk of massive capital flow reversal in the emergingeconomies is now lessened. Short-term capital may still want to remain exposed to emerging markets (if not adding exposure) given both the interest rate and growth differential; and

v) Further appreciation can be expected for Asian currencies (MYR forecast for 2011: RM2.95-3.05/US$).

# The main risk of FOMC prolonging its stimulus policy is that inflation-fighting exercise by Asian countries may tip the region’s economic growth. At this juncture, this risk is not yet elevated as the economic fundamentals of Asian countries remain sound while tightening is done at an incremental step. However, extended sharp rise in commodity prices may lead to over-tightening and choke economic growth.

Source: HLIB Research

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