Dah Sing Bank Predicts Single Rate Cut by Fed This Year

Dah Sing Bank has maintained a neutral outlook on U.S. equities, predicting that the Federal Reserve may only reduce interest rates once before the end of the year. The bank's stance comes after the Federal Reserve's decision to keep the federal funds rate target range unchanged at 4.25% to 4.5%, a decision supported by a 9-2 vote, with two members dissenting. This marks the fifth consecutive meeting where the rate has remained unchanged.

The Federal Open Market Committee (FOMC) noted that economic activity in the U.S. has slowed in the first half of the year, a departure from previous statements that described the economy as "expanding steadily." The committee also removed the phrase "uncertainty about the economic outlook has diminished" while retaining the statement that "uncertainty remains elevated."

Federal Reserve Chairman Jerome Powell emphasized that there are still many uncertainties to be resolved, and the current interest rate level is sufficient to address the ongoing uncertainties surrounding tariffs and inflation. He suggested that the next steps might be more neutral but did not provide clarity on whether data would become clearer before the next meeting. Following the FOMC's decision, market expectations for a rate cut in September decreased from over 60% to over 40%.

Dah Sing Bank cited the uncertain impact of the trade war on U.S. inflation and overall economic activity, as well as the relatively stable job market, as reasons for its cautious outlook. The bank also noted that recent trade agreements between the U.S. and major economies, along with strong earnings from leading technology companies, have supported a steady rise in U.S. equities. However, the bank warned that U.S. equities are significantly overvalued, and with reduced expectations for rate cuts, the likelihood of U.S. equities outperforming other markets in the near term is limited.

In the bond market, Dah Sing Bank has downgraded its outlook for sovereign and investment-grade corporate bonds to "neutral," citing a slowing pace of rate cuts by major central banks and increasing concerns about fiscal prospects. The bank expects that longer-term bonds may underperform shorter-term bonds. The bank's analysis suggests that the impact of the trade war on U.S. inflation and economic activity is still unclear, and the job market remains relatively stable. Therefore, the likelihood of a rate cut in September is low, and there may only be one rate cut in the fourth quarter. The final pace of rate cuts will depend on whether data weakens further in the coming months and how tariffs affect price trends.