• US inflation higher than expected; dollar rallies

Global Highlights

Dollar Index – The dollar gained 1.37% to 109.815, rebounding to the same level after losing for the past two weeks. Prior to the CPI numbers’ announcement, the dollar was trading at around 107.800. The inflation numbers showed that inflation pressure has not subsided, only receding to 8.3% y/y (July 2022: 8.5% y/y, 0.1% m/m consensus: 8.1% y/y). Core inflation, which is what FOMC pays attention to, increased from 5.9% y/y in July, to 6.3% y/y in July 2022 (0.6% m/m).

We now expect the Fed to raise the borrowing costs faster and further than previously expected after data showed underlying inflation broadening out rather than cooling as expected.

Instead of our earlier view of 50bps hike in September, we now foresee a third straight 75-basis-point interest rate hike. The inflation level has been under appreciating and still entrenched. Hence, the Fed will require stronger response.

This would lift the Fed's current 2.25%-2.5% policy rate range to 3%-3.25% in September and the policy rate is poised to settle at 3.75.% -4.00% by end-2022 — with a 50bps hike in November and 25bps hike in December.

Should inflation remain a menace to the Fed, a stronger rate hike will remain in December i.e. a 50bps instead. Should that happen, the FFR will normalize at 4 00- 4.25% by end-2022.

US equities & sovereign bonds – Wall Street was on the downside after the US CPI announcement. Dow Jones lost 3.94% to 31,105, S&P 500 down 4.32% to 3,932 and the tech heavyweight Nasdaq plunged 5.16% to 11,634. The UST10Y benchmark yield was at 3.408%, while the UST2Y was at 3.756%, bringing the differential between them to -34.80bps.

Euro – The euro closed lower by 1.50% to 0.997 due to the stronger dollar. Outlook in the Euro Zone is not looking great either as the ZEW economic sentiment index remained on the downside, mainly due to headwinds in the energy sector, cost of living issues, and high inflation environment.

British pound – The pound down 1.63% to 1.149 as the dollar gained. On a macro front, the UK unemployment rate continue to its downward trend, declining to 3.6% in August. However, inactivity rate increased by 0.4 ppts to 21.7%, suggesting that more people left the workforce.

Japanese yen – The yen declined 1.22% to 144.580, wiping of its gain for the past two days due to the stronger dollar. The continuous decline has prompted Japanese policymakers to intervene to prevent it from depreciating further to the same level as the 1998 Asian financial crisis.

Chinese yuan – The yuan lost 0.13% to 6.935 due to the stronger dollar. China’s government is expected to roll out more economic stimulus to boost spending and investment, addressing the slump caused by the zero-Covid policy and poor prospect in the real estate market.

Korean won – The won gained by 0.66% to 1,374.09 but still remained on the weaker side so far this year.

Australian dollar – The Aussie dollar weakened by 2.29% to 0.673 due to the stronger dollar, wiping off the Aussie’s gain past two weeks. A survey showed that the Australian business confidence remained strong in August despite the rising lending rates and high inflation environment.

Commodities Highlights

Crude oil – Brent down 0.88% at US$93.17 per barrel, and WTI also down by 0.54% to US$88.31/barrel. Concerns on tighter supply increases as the progress on the Iran nuclear deal fades.

Gold – Gold declined 1.30% to US$1,702/oz due to the stronger dollar.

Malaysia Highlights

Malaysian ringgit – The ringgit depreciated 0.11% to 4.508 due to the stronger dollar. Throughout the day, the MYR was trading between 4.503 and 4.508. The finance minister said that the government expects the economy will grow faster than the current’s expectation of 5.3 – 6.3%, as forecasted by BNM. Growth continued to be supported by strong private consumption.

KLSE – The FBM KLCI was down 0.68% to 1,488. Detailed transactions showed that local institutions and foreign investors were net sellers of RM40.8mil and RM22.4mil respectively. Local retails were buyers of RM63.2mil.

Fixed Income - The MGS 3y remained at 3.350%, 5Y remained at 3.770%, 7y down -1.0bps to 3.940%, and 10y down -1.0bps to 4.050%.

Rates – The yield for the 3-year was down 0.5bps to 3.575%, 5-year -3.5bps to 3.700%, 7-year -3.0bps to 3.805%, and 10-year -2.5bps to 3.990%.

Against major currencies – The ringgit was stronger against the JPY, CNY, THB, and VND but weakened against the EUR, GBP, AUD, SGD, IDR and PHP.

Ringgit Outlook for the Day

We expect the MYR to trade between our support level of 4.500 and 4.510 while our resistance is pinned at 4.515 and 4.550.

Source: AmInvest Research - 14 Sept 2022