Malaysia - Lack of inflationary pressure

Headline inflation grew slightly slower by 1.4% y/y in July while core inflation that excludes fresh food as well as administered prices of goods and services inched up slightly to 2.0% y/y to report the highest increase since January 2018. For the first seven months of 2019, headline inflation averaged 0.3% y/y while core inflation averaged at 0.8% y/y.

In our view, the July inflation data continues to support our view that the current pace of economic activity remains insufficient to lift price pressures. With overall sentiments continuing to remain weak, we expect inflation to remain soft in the coming months. A potential rise in inflation will be due to a low base impact arising from the tax holiday period in 2018. Targeted fuel subsidies should keep price pressures subdued in 2019. In the meantime, we maintain our 1% growth target for headline inflation, with our lower end at 0.5%.

• Headline inflation grew slightly slower by 1.4% y/y in July from 1.5% y/y in June. Though it fell in line with our expectations, it was marginally below market consensus of 1.5%. But core inflation that excludes fresh food as well as administered prices of goods and services inched up slightly to 2.0% y/y from 1.9% y/y in June to report the highest increase since January 2018.

• The slower gain in headline inflation was due to a weaker rise in utilities prices, up 1.9% y/y in July from 2.3% y/y in June. Besides, the clothing & footwear prices fell by 1.1% y/y from -0.7% y/y in June. Also, transportation price continued to decline by 1.9% y/y in July from -2.1% y/y in June.

• In July, fuel pump prices for RON95 and diesel prices remained unchanged. Supported by the blanket fuel subsidies, fuel prices for RON95 and diesel were capped at RM2.08/litre and RM2.8/litre, respectively. Thus, the annual change for RON95 and diesel prices fell 5.5% and flat for the fourth consecutive month in a row. Meanwhile, RON97 pump price rose 0.37% y/y to RM2.57/litre in July from RM2.51/litre in June.

• Food & non-alcoholic prices picked up slightly to 2.4% y/y in July from 2.3% y/y in June driven by costlier milk & eggs (2.6% y/y from 2.5% y/y) and fruits (2.5% y/y versus 1.1% y/y). The implementation of sugar tax on soft drinks and juices effective 1 July saw soft drinks & juices price rise 2.9% y/y in July from 2.8% y/y in June. But the impact on inflation is low due to its weightage of only 0.5% in the CPI basket.

• In our view, the July inflation data continues to support our view that the current pace of economic activity remains insufficient to lift price pressures. With overall sentiments continued to remain weak, we expect inflation to remain soft in the coming months. Potential rise in inflation will be due to low base impact arising from tax-holiday period in 2018. Targeted fuel subsidies should keep price pressure subdued in 2019. In the meantime, we maintain our 1% growth target for headline inflation, with our lower end at 0.5%.

China - Expect more stimulus measures

July industrial output fell to its slowest rate in 17 years by 4.8% y/y while retail sales grew 7.6% y/y, the weakest since April. Fixed asset investment slowed down to 5.7% y/y. The latest data suggests that the overall broad-based economic activities are slowing down.

After holding up reasonably well in 1H2019, we foresee the economy facing renewed downward pressure in 2H2019. Thus, it will likely prompt Beijing to turn to fresh easing measures to stimulate growth. We expect the renminbi to stay above 7 against the dollar and could likely slide to 7.10. Despite having a weaker renminbi, it may not fully address the impact from US tariffs and the global economic slowdown.

• Industrial output fell to its slowest rate in 17 years in July. It is the latest sign that demand for goods is sliding amid a damaging trade war with the US. The gauge – a broad measure of manufacturing production – rose by 4.8% y/y in July, its weakest rate since February 2002 and from 6.3% in June.

• Meanwhile, retail sales grew by 7.6% y/y in July, their weakest rate since April and from 9.8% y/y in June. Fixed asset investment slowed down to 5.7% y/y in July from 5.8% y/y in June with private investment up 5.4% y/y from 5.7% y/y but public investment expanded 7.1% y/y versus 6.9% y/y in June.

• The broad-based slowdown in activity and spending suggests that after holding up reasonably well in 1H2019, the economic growth now faces renewed downward pressure. We expect a further slowdown in economic activity as we move along. Thus, it will likely prompt Beijing to turn to fresh easing measures to stimulate growth.

• We expect the renminbi to stay above 7 against the dollar and could likely slide to 7.10. However, a weaker renminbi may not fully address the impact from US tariffs and the global economic slowdown

Source: AmInvest Research - 15 Aug 2019