The US central bank’s target has shifted from a post-crisis exercise to maintaining a healthy and sustainable economic growth, said Fed Chairwoman Janet Yellen last night in Michigan. 

Earlier jobs market figures showed that the unemployment rate dropped to a 10-year low of 4.5%, giving policymakers leeway to reduce the level of support that the central bank is providing to the economy, and to shift to a neutral policy stance.

The market now expects another two quarter-percent rate hikes this year, as it digests the Fed’s plan to shrink the $4.5 trillion balance sheet built up during its time of crisis. According to Reuters’ polls, 5 of the Fed’s fifteen primary dealers expected the Fed to start paring investments by year-end, while the rest had forecast that the central bank would do so by the end of Q2 2018.
Currently, the Fed holds $2.46 trillion in US treasuries bonds and $1.77 trillion in mortgage-backed securities (MBS), which in total accounts for 94% of the Fed’s $4.5 trillion balance sheet.

Reducing the Fed’s balance sheet is going to be a painful, long-term project. It will gradually pull out liquidity from the banking system and ultimately have a significant impact on the stock and forex markets. Emerging-market assets will be under pressure as they are more susceptible to capital outflow when liquidity starts to tighten up. The analysis is built on the assumption that the US economy is on a path of solid growth, which is exactly what the Fed is trying to maintain. 

US equity markets closed flat last night, giving little direction to Asia’s opening today. WTI oil prices advanced 1.8% last night to the $52.9 area, lifting the energy sector and the Canadian dollar. CAD/USD climbed 0.54% to the 0.7507 area last night.

Singapore

In Singapore, the strong oil price is going to provide some support to banking, oil and gas stocks in the near term. However, as other major markets – including the US and HK – continue to consolidate, and uncertainties surrounding Trump’s infrastructure plan and foreign policy remain, sentiment is likely to remain fragile. The immediate support and resistance levels for the Straits Times Index can be found at around 3,160 and 3,200 respectively. 

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