US

More downside risk

As expected, the Fed left the policy rate unchanged during its policy meeting this week. The Fed also pledged that future moves will be done patiently — a key word we were looking out for and dropped the language that more rate hikes likely would be warranted – with "further gradual increases", and said it was adopting a more cautious approach. On the Fed's balance sheet, it will consider adjusting the reduction of the central bank's bond portfolio if conditions warrant, suggesting there is more downside risk emerging. It is a sign we were also looking out for. With the policy rate kept at 2.25%–2.50%, added with a more cautious tone by the Fed, we believe there is more room for the Fed to hold rates and even cut rates as early as 2H2019 should the risk of recession becomes more prominent. If there are no major adverse shocks, we can foresee one rate hike this year.

• As expected, the Fed left the policy rate unchanged during its policy meeting this week. The Fed also pledged that future moves will be done patiently — a key word we were looking out for and focus on how the economic conditions unfold.

• Also, the Fed dropped the language that more rate hikes likely would be warranted – with "further gradual increases," as stated after the December meeting – and said it was adopting a more cautious approach.

• On the Fed's balance sheet, the Fed has indicated it will consider adjusting the reduction of the central bank's bond portfolio if conditions warrant. It is an indication that there is more downside risk emerging. So the Fed is expected to operate with "an ample supply" of bank reserves.

• With the policy rate kept at 2.25%–2.50%, added with a more cautious tone by the Fed, we believe there is more room for the Fed to hold rates and even cut rates early as 2H2019 should the risk of recession becomes more prominent. If there are no major adverse shocks, we can foresee one rate hike this year.

Malaysia

Slower exports into 2019

Exports grew 4.8% y/y while imports decelerated by 1.0% y/y in December to bring December’s trade surplus to RM10.4bil. For the full year, exports expanded 6.9% while imports rose 5.0%. Going forward we expect a softer export growth of between 4.5% and 5.0%. Slower demand from major trading partners on the back of a more moderate growth, added with weaker global semiconductor sales and softer commodity prices are the key factors for a more modest exports outlook. We foresee imports to also grow around 4%–4.5% on the back of slower capital expansion. Growth in 2019 will depend on private expenditure i.e. consumption and investment.

• Exports grew faster in December, up 4.8% y/y from 1.6% y/y in November. This brings 2018’s export to average at 6.9% y/y, slightly below our target of 7.2%. Meanwhile, imports decelerated by 1.0% y/y in December from 5.0% y/y in November, bringing 2018’s average at 5.2%, below our projection of 5.5%. Hence, trade surplus in December stood at RM10.4bil while for the full year of 2018, it recorded a trade surplus of RM120bil, higher than 2017’s RM98.5bil.

• Faster exports were largely contributed by a strong rebound in the electrical & electronics (E&E) business segment, up 14.2% y/y from a decline of 1.7% y/y in November. Further supporting exports were chemical & chemical products, up 36.6% y/y versus 15.1% y/y in November as well as telecommunication products, up 16.2% y/y from 5.7% y/y in November.

• Meanwhile, commodity-related exports remained weak in December. The palm oil & palm oil-based products contracted by 27.2% y/y from -21.1% y/y in November while petroleum products declined by 18.4% y/y from a gain of 41.2% y/y in November.

• Imports in December was dragged by capital goods, which fell by 21.7% y/y from -2.1% y/y in November following the decline in industrial transport equipment. Meanwhile, intermediate and consumption imports grew by 3.1% y/y and 5.7% y/y, respectively in December compared to -0.4% y/y and 1.2% y/y in November, which suggests evidence of moderate growth.

• Going forward, we expect a softer export growth of between 4.5% and 5.0%. Slower demand from major trading partners on the back of a more moderate growth, added with weaker global semiconductor sales and softer commodity prices are the key factors for a more modest exports outlook. We foresee imports to also grow around 4%–4.5% on the back of slower capital expansion. Growth in 2019 will depend on private expenditure i.e. consumption and investment.

Source: AmInvest Research - 31 Jan 2019