TREASURY REPORT

Financial Market Part 1 & 2.docx

Financial Market Part 1 & 2:

The team will provide an insight on the behavior of the money market rate in Singapore over the past 3 years via the interest rate, inflation and the Gross Domestic Product (GDP) growth chart. Subsequently, the team will also did a forecast on the next 6 months rates so as to proceed on to the money market trading strategies in the later part of the report.

Firstly, the team will be discussing on the interest rate chart with trend from Year 2010 to Year 2014 (1st quarter).

( http://www.tradingeconomics.com/singapore/interest-rate )

From the chart above, it is observed that Singapore interest rate has increased over the past 3 years.

After analyzing the growth of Singapore, the team concluded that the increase is interest rate is closely related to the SIBOR. Singapore is having a high SIBOR rate throughout the past 3 year and these high SIBOR rate causes a large number of borrowers in the market to borrow loans. Additionally, these borrowers are mostly from the mortgage loan whereby they comprise 30% of the total loan ( http://sbr.com.sg/financial-services/exclusive/what-should-singapore-banks-brace-themselves-in-2014 ).  The main reason for mortgage loan to constitute such a huge portion is due to the phenomenal of the property bubble that Singapore is facing over the past 3 years.

Hence, it is observed that the demand for loanable fund has increased that would cause the demand curve to shift to the right side, D1 to D2. Hence, the level of interest rate increases from R1 to R2 while the supply of loanable fund (S1) remains (Fig 1).

Secondly, the interest rate chart with trend from Year 2010 to Year 2014 (1st quarter)

http://www.tradingeconomics.com/singapore/inflation-cpi

As we can see from this chart, with reference to the inflation trend, it can be inferred that the inflation rate in Singapore is relatively stable though there has been a slight decrease through the past 3 years, having the inflation rate hitting its lowest in the past four years in Jan-Feb 2014.

As the main reason for the decrease of inflation rate in Singapore is due to the drop of Consumer Price Index (CPI). There is a decrease in the private road transport costs, recreational and entertainment which helped to moderate the inflation rate. Even though there was an increase on food and housing sectors, however, the lower costs of transport and communication sectors have offset the higher costs resulting in a fall in CPI which thus leads to the slight fall in inflation as well. Thus, it can be inferred that there is a decrease in supply of the Singapore currency which makes the demand higher.

http://sbr.com.sg/economy/news/singapore-inflation-moderated-24-in-2013

http://www.tradingeconomics.com/singapore/inflation-cpi

http://www.bls.gov/dolfaq/bls_ques6.htm

Following by the Singapore GDP from Year 2010 to Year 2013.

http://www.tradingeconomics.com/singapore/gdp

From this chart it can be seen that there is a drastic increase in the GDP through the past 3 years. One of the reasons why the GDP of Singapore will rise is due to the increased manufacturing output during the Year 2012 to 2013. In addition there was also an expansion and growth in the trading and service industry as well through the past 3 years. From this chart it can be inferred that Singapore has a relatively stable and growing economy. With such a strong economy, the team believes that Singapore’s GDP will hit an even higher peak by the end of 2014 with an optimistic outlook due to the investment and business activities happening. http://sbr.com.sg/economy/news/singapore-gdp-predicted-grow-4-in-2014  

http://www.focus-economics.com/en/economy/charts/Singapore/GDP

Interest rate forecast for Year 2014:

The prediction for 2014 GDP will be even higher than the GDP in 2013, hence this will indicate that more investment activities can be noticed and the number of loans and borrowers will increase too. However, according to a Straits Times articles found in Jan 2014 ( http://www.stproperty.sg/articles-property/singapore-property-news/more-borrowers-opt-for-fixed-rate-home-loans/a/148797 ) , it seems that many borrowers are rather worried about the hike of interest rate that is likelihood to occur in 2015 ( http://www.theredpin.com/blog/mortgage/fixed-interest-rates-a-better-choice-than-variable-amid-potential-hike ).  This hike of interest rate will possibly impact on many borrowers and investors as it will incur a greater cost for them. Therefore, many of them had switched over to the fixed rate loan package rather than the floating rate loan package( http://www.stproperty.sg/articles-property/singapore-property-news/more-borrowers-opt-for-fixed-rate-home-loans/a/148797 ). From this, it is observed and predicted that the interest rate for the next 6 month will experience a slight decrease.

Inflation rate forecast for Year 2014:

Inflation rate can be affected by 2 factors, the demand-pull and the cost-push. The cost-push inflation can be defined when prices of the production process increases such as the raw materials or wages increase will have an impact on the inflation rate of the country.

http://www.frbsf.org/education/publications/doctor-econ/2002/october/inflation-factors-rise

With accordance to a finance article, it is stated that the expected inflation rate will range between 2 to 3 percent and averages at 2.8% in the year of 2014 ( http://www.focus-economics.com/en/economy/charts/Singapore/Inflation ).

One of the reasons why inflation rate might be pushed up in 2014 may be due to the increase of wages in Singapore workforce mainly for reason such as employee retention in companies. An expected increase of 4.5% (higher in inflation, lower in real term) is expected to increase in the wages which is higher than the inflation forecast of Singapore in 2014. If the wages in Singapore increases, companies have to charge their product/services at a higher amount, when this happens, the higher production costs will lead to an overall decrease in supply and an increase in the overall price level which leads to an increase in inflation.

http://business.asiaone.com/news/inflation-take-big-bite-2014-wage-hikes-polls

http://www.investopedia.com/terms/w/wage-push-inflation.asp