No taper yet KLCI: 1,771.40. To exert downward pressure on longer-term interest rates
Economic recovery seen but... The US economy is progressing “at a moderate pace” on the road to recovery However the US Fed is unsure on its sustainability.While most of the economic indicators are favorable, recent rise in longer-term interest rates is not supportive of the mortgage markets and is less accommodative to a stronger economic recovery.
• Labor market conditions – improved (FAVOURABLE)
• Household spending – advanced (FAVOURABLE)
• Business fixed investment – advanced (FAVOURABLE)
• Housing sector – strengthening (FAVOURABLE)
• Long-term inflation expectations – stable (FAVOURABLE)
• Mortgage rates – rising (UNFAVOURABLE)
• Unemployment rate – remains elevated (UNFAVOURABLE)
• Fiscal policy – restraining economic growth (UNFAVOURABLE)
…no taper yet as the US Fed needs more evidence of sustained progress… Hence the FOMC said that it needs “more evidence that progress will be sustained before adjusting the pace of its purchases”.
…as well as to reverse recent tightening of financial conditions.While the US Fed believes “the downside risks to the outlook for the economy and the labor market ashaving diminished”, but “the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.” Hence the decision to not to taper (yet) is meant to:
• Exert downward pressure on longer-term interest rates, i.e. support mortgage markets, which in turn shall
• Help to make financial conditions more accommodative, i.e. promote a stronger (and more sustained) economic recovery.
Verdict: Taper overhang persists.The local market (as well as other regionals) is expected to react positively on this development. Nevertheless the overhanging worries over the eventual timing and pace of QE3 taper persist. Maintain KLCI year-end target at 1,800 points.