Muted impact from Fed rate hike

PETALING JAYA: Analysts have noted that while the hike in interest rates by the US Federal Reserve (Fed) was widely anticipated, the bigger concern is the surge in US Treasury yields – with the 10-year breaching 5% – making bonds more attractive than equities and possibly drawing away some liquidity from emerging markets (EMs) like Malaysia.

The local benchmark FBM KLCI, however, closed 4.5 points lower at 1,674 points on the action but analysts fear more downside could be imminent, especially since further Fed rate hikes are now on the table.

Interest rates in the United States are now higher at 3.75% to 4%, and the rate hike was the first since July 2023.

Immediately after the rate hike, a market sell-off in equities was seen in the United States as the Dow Jones Industrial Average fell 1.21% to 51,461.90 with market pundits pointing out the rate hike had already been anticipated by and large.

Berjaya Research head of research and executive director Kenneth Leong said much of the recent weakness in global equities had already reflected the widely anticipated Fed hike and expectations for further tightening later this year.

“But the key concern for equities is the continued rise in US Treasury yields, with the 10-year yield breaching 5%, resulting in US fixed income becoming increasingly attractive relative to riskier assets such as the equity markets,” he told StarBiz.

“This could encourage rotation of global liquidity towards US bonds and place further pressure on EM equities, including Bursa Malaysia,” he added.

Leong said the risk of a broader correction had consequently increased, although he did not expect selling pressure to be indiscriminate.

“While the risk of a broader market correction has increased, we expect any weakness to remain measured and selective, with earnings resilience and attractive valuations providing some support to fundamentally sound counters,” Leong said.

He remained positive on the broader equity outlook, supported by resilient economic growth and continued investment linked to artificial intelligence (AI).

“We remain positive on the outlook for equity markets, underpinned by resilient economic growth and the continued strength of the AI investment cycle,” he said.

“Major technology companies remain committed to multi-billion-dollar capital expenditure programmes to expand AI infrastructure, data centres and computing capacity, providing tangible support to the broader technology ecosystem and corporate earnings,” he added.

Nevertheless, Leong said investors were likely to become more selective amid geopolitical and inflationary pressures.

“Ongoing Middle East tensions, the prospect of stickier inflation and higher-for-longer interest rates are likely to drive greater selectivity, with investors favouring companies offering visible earnings growth, structural catalysts and reasonable or attractive valuations.”

Another market analyst said the rise in rates in the United States could also help rein in speculative flows into key commodities such as oil.

Brent crude oil fell 1.18% to US$104.58 per barrel at the time of writing.

Meanwhile, Quintex Intel global strategist Stephen Innes said the Fed’s September decision delivered a more hawkish message than the quarter-point increase itself, particularly after officials signalled that further tightening remained on the table.

“The Fed raised rates for the first time since 2023, but the quarter-point hike was never going to matter. The decision was almost completely priced in, the vote was unanimous and the statement offered little more than an acknowledgement that domestic spending remained resilient,” Innes said in his commentary.

He said the market’s attention shifted instead to Fed chairman Kevin Warsh’s description of the move as removing a “dose of accommodation”, which suggested monetary policy might still not be sufficiently restrictive.

“That phrase transformed an expected rate hike into a much less comfortable policy message. Removing a dose of accommodation is not the language of a central bank that believes it has completed the job,” Innes said.

“It suggests policy was still providing support before Wednesday and may not yet be restrictive after it.”

Innes said the Federal Open Market Committee’s latest projections strengthened that interpretation, with 16 officials expecting at least one additional increase in 2026 and four pencilling in a total of three hikes.

“The one-hike camp did not lose by a narrow margin. It was pushed to the outer edge of the distribution,” he said.

Innes also said the September meeting had effectively shifted expectations from a one-and-done move to a “one plus one” baseline, with Goldman Sachs adding another 25-basis-point hike in October to its forecast.

“The market came into the September meeting debating whether the Fed would deliver one hike and step back. It left with a much clearer message. September was not one and done. The committee’s working baseline is now one plus one, with a smaller group already leaning toward one plus two,” he said.

He added Goldman still regarded the longer-term market path as potentially too hawkish because its own core personal consumption expenditures inflation forecasts were below the Fed’s medians.

“That leaves the market with two different trades sitting inside the same call. The first is the near-term trade, where the Fed has made October increasingly difficult to fade. The second is the longer horizon, where Mericle still believes markets are charging too much for a sustained tightening cycle.”

For Malaysia, JP Morgan said in a note yesterday that it remains overweight on the local equity market with a 12-month FBM KLCI target of 1,900, while seeing the clearest upside from Budget 2027 in technology and utilities or renewable energy, followed by value-oriented consumer stocks.

The investment bank said the upcoming budget was likely to place greater emphasis on cost-of-living support for middle-income households while continuing to protect lower-income groups, although such measures were expected to preserve spending power rather than trigger a consumption boom.

“Investment policy is increasingly aimed at keeping more of the benefits in Malaysia, through local suppliers, technology transfer and higher-value jobs, with semiconductors, digitalisation and the energy transition still priorities,” JP Morgan said.

It expects fiscal discipline to remain intact, with the budget deficit narrowing to 3.4% of gross domestic product in 2027 from 3.5% in 2026.

“We see the clearest upside in technology and utilities/renewables, followed by value consumer while construction remains a private-capex/data centre (driven) call rather than a budget call,” it noted.

JP Morgan said semiconductor localisation could provide the clearest earnings upside, while data centre demand and the National Energy Transition Roadmap should continue supporting investment in generation, grids and renewable energy.

For the consumer sector, the research house said targeted support to the B40 and M40 income groups should help keep staples demand resilient, although discretionary spending could remain under pressure.

“Simply put, keep attracting private investment, but make more of the spending, jobs and earnings stay in Malaysia,” it said.