Macro: Central Banks and Financial Markets: Time to Embrace Some Humility and more

• Fed credibility is on the line at this week’s policy meeting. Globally, central banks eased too aggressively during the pandemic and were too slow undertaking remedial measures to fight inflation. 
• Central banks no longer encourage investors to embrace duration risk, but there are costs imparted to the banking system and the corporate sector via higher capital costs.     
• Restoring US price stability requires time due to sticky service inflation, while future Fed credibility hinges critically on firm forward guidance being issued this week.  

• Monetary data shows that it is local government bond issuance that is powering monetary growth while private sector credit demand remains weak.
• Export volume growth suggests that external demand is less able to support the economy. And weak inflation reflects languid domestic demand.
• The rash of recent macro data essentially shows that while the worst is likely over for the economy, policy easing has not imparted a meaningful boost to domestic demand.

• The FOMC hiked its policy Fed Funds rate by 75bp on 15 Jun’22, the sharpest single hike in 28 years, taking the central rate to 1.625% (official range of 1.5-1.75%).
• With headline CPI inflation at 8.6%YoY in May’22, and wage inflation at 5.2%, inflationary expectations needed to be nipped in the bud, and the Fed has finally taken decisive action.
• We expect the FF rate to reach 3% by Sep’22, then rise more sedately. This will induce a shallow recession by Mar’24. We are bullish on a 6-month view.

• Second consecutive month of higher YoY growth
• OFWR outlook – host economies’ re-opening tailwinds vs global headwinds
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Overseas Filipino Workers Remittances (OFWR) growth picked up further in Apr 2022 to +3.9% YoY (Mar 2022: +3.2% YoY). Our 2022 OFWR growth forecast is +4.2% (4M 2022: +2.7%; 2021: +5.1%). OFWR outlook faces the upsides from host economies’ re-openings and the downsides from Russia-Ukraine war drags on Europe plus risk of US hard landing. Historical data suggest positive correlation between OFWR and crude oil price, USDPHP in the event of stronger USD/weaker PHP, and domestic inflation rate.

• Fed rate hikes cycle into even higher gear
• FOMC dot plot signals above-3% fed funds rate in 2022-2024
• “Hawkish” tilts among ASEAN central banks

14-15 June 2022 FOMC meet saw the target fed funds rate (FFR) raised by +75bps to 1.50%-1.75% range. Fed’s latest “dot plot” signals another +175bps FFR hikes in the remaining four FOMC meetings this year to 3.375% in 2022 vs 1.625% mid-point of current target FFR range, with current hikes cycle ending in early-2023 at 3.75%.