Commentary: Fed hiking cycle likely over
On Wednesday last week, the Federal Reserve hiked by another 25bps to bring the base rate to 5.0%-5.25% range. This is widely anticipated to be the last rate increase, with markets now pricing in only a 13% chance of another 25bps hike in June. With this being said, the main theme for markets in coming months will be recession prospects in the US rather than the Fed’s monetary policy.
While the US has shown relative resilience during the current inflationary period, some deterioration of economic conditions is already observed. Firstly, despite the latest payroll figure surprising on the upside, it still stands well below the average level of past year. The private sector has also downgraded their hiring forecasts for 2023, implying the gradual softening in labor market. Moreover, both manufacturing and services PMIs (some of the major activity indicators) have worsened considerably in past months. While services PMI has fallen from c.55 to c.52 since January, manufacturing PMI has reached c.47 (indicating contraction in manufacturing sector). Tighter credit conditions is likely to weigh further on economic activity. Lastly, regional banks in the US still seem to be facing financial hardships. Unrealized losses on various debt securities and sizeable deposit outflows pose further liquidity risk for these banks.
