• US inflation hits fresh 40-year high

• Economic Update: US Inflation accelerated in June

Global Highlights

Dollar Index – The greenback consolidated as it edged 0.11% lower to 107.96 following the release of US CPI data. The inflation rate for June came in hotter at 9.1% y/y, the fastest pace since 1981, from 8.6% y/y and market expectation of 8.8% y/y. It was driven mostly by the runaway inflation in energy, food and shelter. Excluding food and energy prices, the core CPI inflation rate rose to 5.9%, slightly slower than 6.0% in May but beating market expectation of 5.7%. Combined with a strong labour report last Friday, we expect the Fed to continue its tightening policy path with a 75bps hike on the table. However, the Fed funds futures are now pricing in more than a 67% chance of a 100bps rate hike in the July meeting.

US equities & sovereign bonds – Wall Street was red across the board with Dow Jones falling 0.67% to 30,773, S&P500 losing 0.45% to 3,802 and Nasdaq trailing 0.15% to 11,248. The UST10Y benchmark yield fell 3.5bps to 2.934% while the UST2Y rose 10.6bps to 3.155%, widening the rate inversion to 22.1bps.

Euro – The euro gained 0.22% to 1.006 after hitting US$1.00. The euro’s temporary historic drop to parity with the US dollar has left the ECB in a bind as it is expected to raise interest rates next week. However, an aggressive policy tightening may risk sending economic growth into a reverse.

British pound – The pound was stagnant at 1.189 despite positive news on local economic growth. Britain's economy expanded 0.5% m/m in May, dashing market’s expectation of a stagnant 0% growth. It was mainly driven by the health sector as doctor appointments rose while increased demand for holiday packages has benefitted travel agencies as well.

Japanese yen – The yen weakened 0.38% to a new 20-year low of 137.39. The Reuters Tankan Manufacturers Sentiment Index remained unchanged at 9 for the month of July 2022 amidst a weaker yen that has pushed imports’ cost upwards and China’s zero-Covid policy.

Chinese yuan – The yuan strengthened 0.09% to 6.719. A scorching heatwave in China of around 40 degrees Celsius may threaten its rice and cotton yields and further pressure the local electric grid amidst elevated oil prices.

Korean won – The won strengthened 0.43% to 1,306. The Bank of Korea (BoK) raised its interest rate by 50bps to 2.250%, the largest hike on record and the highest level we have seen since 2014. The move appeared to be part of its effort to fight a 23-year high inflation. Officials also warned that further tightening is being considered as inflation is deemed to stay above 6% for a certain period. Meanwhile, data showed that South Korea’s unemployment rate climbed to 2.9% in June from 2.8% in May 2022.

Australian dollar – The commodity-linked currency gained 0.03% to 0.676, still hovering around its recent 2-year low it hit recently, due to the Fed’s super hawkish tightening cycle which may induce recession.

Commodities Highlights

Crude oil – crude oil remained pressured by the concern that aggressive interest rate increases to combat inflation would trigger an economic slump and stringent China’s lockdown would affect oil demand. Nonetheless, Brent added 0.08% to US$99.6 per barrel while WTI gained 0.48% to US$96.3 per barrel.

Gold – The gold price rose 0.55% to US$1,735/oz.

Malaysia Highlights

Malaysian ringgit – The ringgit strengthened marginally by 0.05% to 4.437, almost touching its weakest level since the pandemic started and traded within the range of 4.437 and 4.429. The local labour market may be pressured by Indonesia’s temporary freeze on its workers coming into Malaysia.

KLSE – The FBM KLCI dropped 1.04% to 1,411, erasing gains made over the last two years. Detailed transactions showed that foreign investors were net sellers with RM81.9mil position, offset by the RM34.0mil and RM47.9mil buying flow from local retailers and institutions, respectively.

Fixed income – Most benchmark yields in the local bond market saw mixed bids with 3-year +1.0bps to 3.460%, 5-year -3.0bps to 3,740%, and 10-year - 1.0bps to 4.050% but the 7-year remained at 4.000%.

Rates – The IRS yield for (3Y) was +1.0bps to 3.385%, (5Y) +0.5bps to 3.535%, (7Y) +3.5bps to 3.655%, and (10Y) +3.0bps to at 3.750%

Against major currencies – The ringgit held the upper hand against the JPY, CNY, IDR, and VND but lost against the EUR, GBP, AUD, SGD, THB, and PHP.

Ringgit Outlook for the Day

We expect the MYR to trade between our support level of 4.4100 and 4.4150 while our resistance is pinned at 4.4480 and 4.4500.

Source: AmInvest Research - 14 Jul 2022