Review:  After an encouraging 3.5% rise in January, the Singapore market returned all its gains to finish 1Q23 relatively unchanged. Higher-than-expected inflation in the US plus jitters over banks pushed markets lower. Singapore banks were sluggish (Figure 1). The largest gainers were conglomerates from successful restructuring and better- than-expected results (Figure 2). Property counters were surprisingly the weakest as higher interest and a large pipeline of new launches haunted investors.

Outlook:  After the March hike of 25 bps we believe the rate hike cycle has paused.  Firstly, real-time inflation data continues to drop: commodity prices (Figure 6), rental (Figure 7) and logistics. Employment was healthy but a notoriously lagging indicator (Figure 8). Secondly, raising rates will only deepen balance-sheet losses for US banks. With government and central bank stimulus, deposits in the US banking system surged by US$4.3tr over three years. Almost US$1.5t p.a., or triple the pre-pandemic level, was deployed to purchase government and mortgage securities (Figure 9). This raised bank balance sheet risk to interest rates. The curse of marking to market is either recognising the security losses immediately (as available for sale) or warehousing (as held to maturity). Thirdly, banks will only tighten their lending standards for fear of a deepening recession or shore up their liquidity with increasingly nervous depositors. A larger worry is the vicious spiralling of banks shrinking their balance sheets globally. Signs of stress remain as banks are still taking loans from the Federal Reserve (Figure 10).

We think the Fed is behind the curve. It is raising rates because economic weakness is not yet obvious. However, lead indicators point to an upcoming recession (Figure 11-12), especially in manufacturing (Figure 13). Conventionally, a catalyst to rally the market would be a Fed pause or interest rate cut. However, over the past three recessions, the Fed cut rates just 3-6 months before a recession. The market only bottoms 1-17 months after a rate cut, depending on the level of contraction in the economy. In Singapore, the external environment is weakening fast. Exports are in their fifth month of decline. The domestic economy will slow but we expect it to be resilient (Figure 14), supported by FDI flows, migration (Figure 15), tourism and fiscal spending (Figure 16).