Malaysia

Expect inflation to gradually trend upwards

We found the headline inflation is still below 1% for the fourth straight month. We think the low inflation of below 1% is partly due to the RON95 fuel subsidy. September inflation grew slightly to 0.3% y/y despite the return of the SST in September. Meanwhile, the underlying inflation has picked up. Core inflation grew 0.3% y/y after being in deflation for the past two consecutive months. Going forward, we expect inflation to gradually trend upwards. But the upside will be muted by the higher base effects. Thus we expect headline inflation to average around 1.5% for 2018 from 3.8% in 2017. Inflationary pressure is expected to come from the slightly weaker ringgit and from the gradual rise in global commodity prices. Still, we expect Bank Negara to maintain its current monetary stance for the rest of 2018.

• Inflation remained tepid in September. It rose by 0.3% y/y, slightly higher than the 0.2% y/y in August. The slight increase was due to the return of the SST in September. Nonetheless, we found inflation staying below 1% for the fourth straight month.

• We think the low inflation of below 1% is partly due to the RON95 fuel subsidy. This is reflected in the slow increase in transport prices, up 0.3% y/y versus 2.1% y/y in August.

• Meanwhile, the underlying inflation has picked up. Core inflation grew 0.3% y/y after being in deflation for the past two consecutive months.

• Going forward, we expect inflation to gradually trend upwards. But the upside will be muted by the higher base effects. Thus we expect headline inflation to average around 1.5% for 2018 from 3.8% in 2017. Inflationary pressure is expected to come from the slightly weaker ringgit and from the gradual rise in global commodity prices. Still, we expect Bank Negara to maintain its current monetary stance for the rest of 2018.

US

Strong headline data

The economy grew at a faster-than-expected rate in 3Q2018 by 3.5% supported by consumer spending, compensating for weak business spending with inflation well contained.

We note the clearly strong headline data amid growing concerns about rising interest rates slowing the economy and the trade war between the US and China. Tax cuts and budget deals early this year helped elevate growth in 3Q2018. We reiterate our December rate hike by the Fed and three more hikes in 2019 and a final hike in 2020 to settle at 3.50%.

• The economy grew at a faster-than-expected rate in 3Q2018 by 3.5% versus our projection at 3.3% and consensus at 3.4% and against 4.2% in 2Q2018. Meanwhile, inflation was kept in check, up 1.6% against 2.0% in 2Q2018.

• Consumer spending, which accounts for more than two thirds of the economic activity, grew by 4% in 3Q2018, the strongest since 4Q2014. However, businesses remained hesitant to increase spending, despite the large corporate tax cut enacted late last year, recording a 7.9% decline, the biggest quarterly decline in business spending since the first quarter of 2016.

• We note the clearly strong headline data amid growing concerns about rising interest rates slowing the economy and the trade war between the US and China. Tax cuts for individuals and the budget deal early this year, which raised federal spending, helped elevate growth in 3Q2018.

• The latest data could increase the likelihood for the Federal Reserve to continue gradually raising interest rates in order to prevent the economy from overheating and to head off inflation. The Fed is expected to raise rates one more time this year, in December, and three times in 2019 and a final hike in 2020 to settle at 3.50%.

Source: AmInvest Research - 29 Oct 2018