Economic Update

Alan Tan Chew Leong T (603) 2146 7540 E alan.tan@affinhwang.com

Naomi Margaret Kasimir T (603) 2146 7532 E naomi.kasimir@affinhwang.com

Mas Aida Che Mansor T (603) 2146 7489 E aida.mansor@affinhwang.com

US Economy – Monetary Policy

US Fed keeps its FFR unchanged at 0-0.25%

The US Fed kept its Federal funds rate unchanged at the range of 0-0.25%

According to the Fed’s dot plot, policy interest rate will be held near zero

until 2023

Fed’s balance sheet expansion to continue at least at the current pace in

order to maintain smooth market functioning.

Development of the economy will largely depend on the course of the outbreak

The US Federal Reserve (US Fed) kept its Federal funds rate (FFR) unchanged at a

range of between 0-0.25% for the fourth consecutive meeting. In its latest

assessment of the economy, the US Fed noted that economic activity and

employment in the US have seen some improvement in the recent months, but still

remain well below their levels at the start of the year. Besides that, overall financial

conditions have also improved in recent months partly due to policy measures to

support the economy and flow of credit to households and businesses. Going

forward, the development of the economy will continue to largely depend on the

course of the outbreak. As such, this will also be a considerable downside risk to

economic outlook over the medium term. In terms of inflation, US Fed aims to

achieve maximum employment and inflation at the rate of 2% over the longer run. As

for the balance sheet, the US Fed guided that it will increase its holdings of Treasury

securities and agency residential and commercial mortgage-backed securities at

least at the current pace in order to maintain smooth market functioning. The Fed’s

balance sheet from asset purchase program rose from US$4.2trn in February to

roughly US$7trn currently, sharply larger than the high of US$4.5trn during the

financial crisis of 2008–2009. The US Fed expects to maintain the FFR at its current

range until “labour market conditions have reached levels consistent” with the Fed’s

assesment of maximum employment and inflation of 2% and is on track to

moderately exceed 2% over some time.

According to the dot plot analysis, the US Fed is projecting to hold rates for the rest

of 2020 and guided that its fed fund rate will be staying at this near zero level until

2023. Nevertheless, the US economy has continued to gradually recover as reflected

in the country’s labour market. In August, the unemployment rate fell for the fourth

consecutive month to 8.4% from 10.2% in July (from its peak of 14.7% in April)

underpinned by nonfarm payrolls, which added 1.4 million jobs in August (+1.7 million

in July). However, as consumer spending accounts for two-thirds of the US economy,

the easing momentum of retail sales growth in July by 1.2% mom compared to 8.4%

mom in June may suggest that the pace of recovery may be slowing. Revival of

consumer spending may also continue to be dampened in the coming months unless

new stimulus measures are implemented soon. In addition, the development of the

pandemic remains as a downside risk to the economy.

In the latest FOMC Summary of Economic Projection, the US Fed increased its GDP

growth forecast from the June FOMC meeting, from -7.6 - -5.5% to -4.0 - -3.0%

projected for 2020. The unemployment rate is projected to be lower with a downward

revision to 7.0-8% from 9.0-10.0%, previously. On the inflation outlook, the median

expectation of PCE inflation was also increased to 1.2% from 0.8% previously while

core PCE inflation projection was also revised higher to 1.5 from 1.0%.

Fig 1: Economic projection by the US Fed

Projection in

September

Variable Central tendency

2020 2021 2022 2023 Longer run

Change in real GDP -4.0 to -3.0 3.6 to 4.7 2.5 to 3.3 2.4 to 3.0 1.7 to 2.0

June projection -7.6 to -5.5 4.5 to 6.0 3.0 to 4.5 - 1.7 to 2.0

Unemployment rate 7.0 to 8.0 5.0 to 6.2 4.0 to 5.0 3.5 to 4.4 3.9 to 4.3

June projection 9.0 to 10.0 5.9 to 7.5 4.8 to 6.1 - 4.0 to 4.3

PCE inflation 1.1 to 1.3 1.6 to 1.9 1.7 to 1.9 1.9 to 2.0 2.0

June projection 0.6 to 1.0 1.4 to 1.7 1.6 to 1.8 - 2.0 Source: US Federal Reserve

17 September 2020

“US Fed aims to achieve maximum employment and inflation at the rate of 2% over the longer run”

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Appendix I: Focus Charts

Source: All data for charts sourced from CEIC and BNM

Chart 1: US FFR Chart 2: US dot plot

Chart 3: Unemployment rate Chart 4: Consumer confidence

Chart 5: US GDP growth Chart 6: US GDP growth breakdown

2020 2021 2022 2023 Longer run

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Appendix II: Monthly US economic data trends

NOV DEC JAN FEB MAR APR MAY JUN JUL AUG

2019 2019 2020 2020 2020 2020 2020 2020 2020 2020

Employment

Change in Payrolls ('000) 261 184 214 251 -1,373 -20,787 2,725 4,781 1,734 1,371

Unemployment Rate (%) 3.5 3.5 3.6 3.5 4.4 14.7 13.3 11.1 10.2 8.4

Jobless Claims ('000) 206 220 201 217 6,867 3,867 1,897 1,408 1,191 884

Consumer & Price Indices

CPI (%mom) 0.2 0.2 0.1 0.1 -0.4 -0.8 -0.1 0.6 0.6 0.4

Change (%yoy) 2.1 2.3 2.5 2.3 1.5 0.3 0.1 0.6 1.0 1.3

Core CPI (%mom) 0.2 0.1 0.2 0.2 -0.1 -0.4 -0.1 0.2 0.6 0.4

Change (%yoy) 2.3 2.2 2.3 2.4 2.1 1.4 1.2 1.2 1.6 1.7

Advance Retail Sales (%mom) 0.0 0.1 0.8 -0.4 -8.2 -14.7 18.2 8.4 1.2 -

Retail Sales ex. Auto (%mom) -0.3 0.5 0.8 -0.5 -3.8 -15.2 12.1 8.3 1.9 -

U. of Michigan Consumer Sentiment

97 99 100 101 89 72 72 78 73 74

Conference Board Consumer Sentiment

126.8 128.2 130.4 132.6 118.8 85.7 85.9 98.3 91.7 84.8

Core PCE (%mom) 0.1 0.2 0.2 0.2 -0.1 -0.5 0.2 0.3 0.4 -

Change (%yoy) 1.6 1.6 1.8 1.9 1.7 0.9 1.0 1.1 1.3 -

PPI (%mom) -0.1 0.3 0.3 -0.5 -0.4 -1.3 0.8 -0.2 0.6 0.3

Change (%yoy) 1.0 1.4 2.0 1.1 0.3 -1.5 -0.8 -0.8 -0.4 -0.2

Personal Income (%mom) 0.5 0.1 0.9 0.8 -1.8 12.2 -4.2 -1.0 0.4 -

Change (%yoy) 3.9 2.9 3.7 4.1 1.8 14.1 9.2 7.9 8.2 -

Personal Spending (%MoM) 0.2 0.3 0.6 0.0 -6.7 -12.9 8.6 6.2 1.9 -

Consumer Credit (US$bn) 7.4 21.5 10.4 20.1 -20.2 -65.8 -14.6 11.4 12.3 -

Housing Indicators

Housing Starts ('000) 1,371 1,587 1,617 1,567 1,269 934 1,038 1,220 1,496 -

Change (%yoy) 13.9 42.1 27.1 37.8 5.5 -26.3 -18.1 -1.2 23.4 -

Building Permits ('000) 1,510 1,457 1,536 1,438 1,356 1,066 1,216 1,258 1,483 -

Change (%yoy) 14.5 9.2 16.7 10.2 2.2 -19.8 -9.1 -1.2 8.6 -

Existing Home Sales (m) 5.3 5.5 5.4 5.8 5.3 4.3 3.9 4.7 5.9 -

Change (%yoy) 3.1 10.4 8.8 7.1 0.8 -17.2 -26.6 -11.7 8.7 -

New Home Sales ('000) 696 731 774 716 612 570 687 791 901 -

Change (%yoy) 13.4 29.6 21.5 7.7 -12.6 -14.2 14.5 9.0 36.3 -

S&P/Case-Shiller Index 218.7 218.7 218.7 219.8 222.1 223.8 224.6 225.1 - -

Change (%yoy) 2.5 2.8 3.1 3.5 3.9 3.9 3.6 3.5 - -

Construction Spending (%mom) 1.3 0.3 1.9 0.2 -0.3 -3.4 -1.3 -0.5 0.1 -

Manufacturing & Production

Industrial Production (%mom) 0.9 -0.4 -0.4 0.1 -4.3 -12.8 0.9 5.7 3.0 -

ISM Manufacturing Index 48.1 47.8 50.9 50.1 49.1 41.5 43.1 52.6 54.2 56.0

ISM Non-Manufacturing Index 53.9 54.9 55.5 57.3 52.5 41.8 45.4 57.1 58.1 56.9

Markit PMI Manufacturing Index 52.6 52.4 51.9 50.7 48.5 36.1 39.8 49.8 50.9 53.1

Markit PMI Services Index 51.6 52.8 53.4 49.4 39.8 26.7 37.5 47.9 50.0 55.0

Capacity Utilization (%) 77.6 77.2 76.9 76.9 73.6 64.2 64.8 68.5 70.6 -

Factory Orders (%mom) -1.1 1.7 -0.4 0.2 -11.0 -13.5 7.7 6.4 6.4 -

Durable Goods Orders(%mom) -2.6 2.8 -0.2 2.0 -16.7 -18.3 15.0 7.7 11.4 -

Empire Manufacturing Index 2.5 3.3 4.8 12.9 -21.5 -78.2 -48.5 -0.2 17.2 3.7

Business Condition Outlook Index 8.4 2.4 17.0 36.7 -12.7 -56.6 -43.1 27.5 24.1 17.2

Leading Indicators

Leading Index (%mom) 0.2 -0.2 0.5 -0.2 -7.4 -6.3 3.1 3.0 1.4 -

1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20

Real GDP, Chain-Weighted (%qoq) 3.8 2.7 2.1 1.3 2.9 1.5 2.6 2.4 -5.0 -31.7

Change (%yoy) 3.1 3.3 3.1 2.5 2.3 2.0 2.1 2.3 0.3 -9.1 Source: Bloomberg, CEIC

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Important Disclosures and Disclaimer

Equity Rating Structure and Definitions

BUY Total return is expected to exceed +10% over a 12-month period

HOLD Total return is expected to be between -5% and +10% over a 12-month period

SELL Total return is expected to be below -5% over a 12-month period

NOT RATED Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation

The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months.

OVERWEIGHT Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months

NEUTRAL Industry, as defined by the analyst’s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months

UNDERWEIGHT Industry, as defined by the analyst’s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months

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