• Euro industrial production rose by 1.5% in August after a -2.3% drop in July. It beat expectations of 0.6%. Yet, the gain failed to erase July’s losses.  

• Being a volatile number based on month to month, we believe it is too early to conclude euro has started to recover. We are expecting a more significant slump ahead as demand is weakening and high energy costs are forcing businesses to slow production or stop it altogether in certain energy-intensive sectors. It is despite an increasing sign of supply chains improving which could unlock some backlogs of production.  

• On a back of a volatile number, we are of the view that ECB has no reason to change tack in terms of its rate hike strategy. ECB is expected to hike rates by 75bps (Oct’22) and another 75bps (Dec’22) to settle at 2.75% (2022). And a 25bps hike in Feb’23 settle at 3.00%.  

• For us to take a dovish view, the ECB would need to see evidence that the economy is contracting quickly. While manufacturing is certainly an important data, it is yet to show any alarming trend.  

The Bank of Korea (BoK) rate hike with two dissenting votes  

• As widely expected, the Bank of Korea (BoK) raised the policy rate by 50bps to 3.00%. The decision follows a 25bps increase in August and its first-ever 50bps hike in July.  

• BoK is caught in a tough position from the won weakens and high inflation. Inflation hit 5.6% in September, slowing marginally for the second straight month. In August, inflation cooled to 5.7% y/y, the first slowdown in seven months.  

• And the won depreciated by 19.6% against the dollar year-to-date. It is at a 13-year low against the dollar. Against the ringgit, it fell by 7.8% year-to-date.  

• Should BoK turn very dovish, we expect the currency to further weaken and inflation would remain high. And if it is too hawkish, bankruptcies will accelerate and this would weigh on the economic performance dramatically.  

• An important point we would like to highlight is the outcome from the latest policy rate decision. There were two dissenting votes which came in as a surprise. The last time the policy rate decision was not unanimous was in August 2021. We feel the latest outcome suggest the dove-hawk tone is shifting slowly from curbing inflation to supporting growth.  

• And with increasing members looking at 3.50% as the terminal rate with some wanting it to or lower, future interest rate hikes are likely to be divided.  

• We now believe with the Fed’s aggressive rate hike is still there. The BoK is likely to raise rates by another 50bps in November. Much will depend on the Fed’s move.

Malaysia’s 3Q22 GDP Expected to Perform Better  

• August industrial production rose by 13.6% y/y from 12.5% y/y in July, beating consensus expectation of 10.8%. All three sub-indices grew across the board — manufacturing (15.2% y/y), electricity (10.0% y/y) and mining (3.2% y/y).  

• Looking at the manufacturing, transport equipment & other manufactures grew by 53.6% y/y (July’22: 73.6% y/y), electrical & electronic products grew by 19.2% y/y (July’22: 17.3%) and wood, furniture, paper products & printing grew by 16.6% y/y (July’22: 27.8% y/y).  

• And distributive trade sales growth soared 33.7% y/y (July’22: 40.7%), supported by the motor vehicles sales which grew 185.3% y/y (July’22: 597.7%), retail trade at 34.5% y/y (July’22: 37.5%), and wholesale trade at 16.0% y/y (July’22: 20.6%).  

• Supported by strong exports and IP data, we expect the 3Q22 GDP to perform better than 2Q22 GDP of 8.9%. Our very preliminary estimation suggests 3Q22 GDP could grow by 9.5% -10.0%.

• With a stronger 3QGDP outlook, we believe BNM will continue to maintain its rate hike momentum in November’s MPC meeting by 25bps to settle at 2.75%. The still high inflation and weak ringgit against the dollar driven by the aggressive rate hike by the Fed is expected to be the main factor.

Source: AmInvest Research - 13 Oct 2022