Economic Update

This week’s highlights will be the FOMC meeting. We are sticking to our forecast of a 75bp hike. In the Eurozone, both 2Q GDP and inflation data will be released.

This is an important week in the US with the July FOMC meeting firmly centred on a 75bp interest rate hike as the Fed will want to bring down inflation.

We saw the market talking up the possibility of a 100bps move following June’s 9.1% US inflation and the Bank of Canada’s decision of a 100bps hike. But recent data that has turned soft suggested an unlikely 100bps hike by the Fed.

After 75bps in July, we expect a smaller 50bp hike in September and 25bps thereafter to bring the target for the Fed funds rate to 3.25–3.50%.

Nominal GDP remains high, and the Fed will want to bring inflation down to 2%.

The Fed is a data-dependent and it will ease in 2023 after lifting the Fed funds rate to just the 3.25% range. That should stave off a deep recession, but could result in double-dip downturns, as in 1980 and 1981–82, at the beginning of the Fed’s successful war on inflation four decades ago.

The Eurozone’s inflation is yet to peak, and we are looking at 8.9% y/y for July.

2Q GDP in euro is expected to see a small gain. We expect a 0.1% q/q growth. The economy would profit from reopening effects for services, but weak manufacturing and a possible inventory correction will dampen the 2Q data.

Also, it is getting fairly quiet in the Eurozone with lots of people going on vacation for their summer breaks.

On Malaysia’s the latest CPI of 3.4%y/y, it suggests that cost-driven inflation remains a strong concern. Although inflation is still low, it is mainly due to subsidies that’s coming up to well above RM75bil.

Minus subsidies, the estimated inflation should be around 12%–13%. And if we use roti canai and teh tarik as the basis, the underlying inflation should be around 54%–63% from an increase of around RM1.20/1.30 to RM2.00.

On the policy rate, with rising nominal GDP, a healthy labour market, weak ringgit against the USD that is expected to add pressure on imported inflation and cost-driven factors due to labour shortages, supply disruptions and freight chargers, a data-driven BNM is likely to raise rates in September by 25bps. Besides 2Q22 GDP is poised to be stronger than 1Q22. Our preliminary estimates based on two months of data suggest a growth of 7.5%–8.0% versus 1Q22 of 5.0%.

On the ringgit front, more upwards pressure remains in the near term. It will still be a dollar play for now until the US narrative changes from inflation to slower growth or recession. The USD/MYR of 4.50/52 levels is still in our cards in the near term. We feel that the bears on the ringgit are still in control. All eyes will be on the Fed, after the ECB.

Source: AmInvest Research - 25 Jul 2022