OREANDA-NEWS. June 23, 2015. The Federal Open Market Committee (FOMC) voted Wednesday to keep the benchmark interest rate at zero, where it has remained since late 2008, but more Fed officials shifted into the camp of no more than one rate increase later this year.

The Fed also reduced projections for how much the fed funds target is expected to increase over the next three years, signaling future hikes will likely be more gradual than earlier anticipated.

Federal Reserve officials maintained their forecast for the benchmark rate to rise to 0.625% this year, while reducing their 2016 projection to 1.625% – lower than their median estimate of 1.875% in March.

Their median forecast for 2017 was 2.875%, down from their estimate of 3.125% in March. Seven of 17 members in the committee now expect either one rate increase or none in 2015, up from just three in March.

Fed Chair Janet Yellen emphasised in a media briefing Wednesday the tightening would be gradual and the Fed wouldn’t follow a “mechanical” formula, with the decision depending on economic data in the months ahead.

The committee now sees 2015 GDP growth at 1.8% to 2.0%, compared with 2.3% to 2.7% in March, and end-2015 jobless rate at 5.2% to 5.3%, versus 5.0% to 5.2% at the March meeting. 

“The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

“The important point is no decision has been made by the committee about what the right timing is of an increase. It will depend on unfolding data in the months ahead. But certainly an increase this year is possible; we could certainly see data that would justify that.”

“I want to emphasize, and I think the IMF would agree with this, that the importance of the timing of a first decision to raise rates is something that should not be overblown, whether it is September or December or March, what matters is the entire path of rates, and as I have said, the committee anticipates economic conditions that would call for a gradual evolution of the Fed funds rate towards normalization.”

US Economic Data

The recent performance of the US economy remains mixed. May retail sales rose 1.2%, in line with economists’ expectations and following a 0.2% advance in April, while May industrial production fell 0.2% month-on-month, extending April’s 0.5% decline. U.S. jobless claims rose by 2,000 to 279,000 for the week ended June 6, indicating employers are retaining workers in anticipation of a pickup in demand this quarter.

May inflation data, leading indicators and weekly jobless claims are due later.

Market Reactions

In the US, the Standard & Poor’s 500 Index rose 0.2% to 2,100.44 overnight. Yields on short-dated U.S. Treasuries fell, while longer dated yields pared gains.

The 3-month Singapore Interbank Offered Rate (SIBOR) eased to 0.81913% from 0.82028% the previous day, while the Singapore dollar climbed 0.2% to 1.3331 per US dollar, extending its advance against the greenback after the Fed decision.

Managing SGD Volatility

Global investors can make use of SGX USD/SGD FX futures to manage their currency risk premiums associated with their exposure to the Singapore equity market. Corporations can also utilise USD/SGD FX futures as cash flow hedge, fair value hedge or net investment hedge to manage currency volatility.

USD/SGD FX futures contracts on SGX have seen a total trading value of S\\$2.25 billion in the year-to-date. Current bid-ask spreads averaging 3 bps provide competitive pricing for mid- and small-sized corporates and non-prime institutions to hedge their currency exposures.

Singapore-listed ETFs with US Equity Exposure

Singapore Exchange (SGX) lists eight ETFs with US Equity Exposure – DB X-Trackers S&P 500 UCITS ETF, DB X-Trackers MSCI USA Index UCITS ETF, SPDR Dow Jones Industrial Average ETF, SPDR® S&P 500® ETF, ISHARES Dow Jones US Technology Sector Index Fund, ISHARES Core S&P 500 ETF, Lyxor ETF Dow Jones Industrial Average, and Lyxor ETF Nasdaq-100.

Details of the relevant ETFs are below. Note the table is ranked according to YTD price gain.

Name SGX Code % Price Change YTD % Change – Div. Adj. YTD % Change – Div. Adj. [1 Year] % Change – Div. Adj. [3 Years] Assets Under Management
LYXOR ETF NASDAQ-100 H1Q 4.5 4.5 18.3 71.9 USD 483.41M
ISHARES CORE S&P 500 ETF I17 2.5 3.0 9.4 66.2 USD 69.14B
SPDR S&P 500 ETF S27 2.5 2.9 9.4 65.7 USD 179.91B
DB X-TRACKERS MSCI USA INDEX UCITS ETF KF8 2.0 2.0 10.6 68.5 USD 1.76B
ISHARES DOW JONES US TECHNOLOGY SECTOR INDEX FUND I21 1.3 1.6 16.9 51.7 USD 3.14B
DB X-TRACKERS S&P 500 UCITS ETF K6K 1.3 1.3 9.9 64.1 USD 1.95B
LYXOR ETF DOW JONES JC6 0.5 0.5 8.4 46.6 EUR 305.91M
SPDR DOW JONES INDUSTRIAL AVERAGE ETF D07 0.1 0.9 9.3 27.5 USD 11.79B
DB X-TRACKERS S&P 500 INVERSE DAILY UCITS ETF HD6 -2.5 -2.5 -11.1 -43.7 USD 345.96M
Average   1.4 1.6 9.0 46.5