Highlight During the Month of February 2023

Economic – Inflation in the US remained stubbornly high, leading to re-pricing of the Fed Funds outlook. Malaysia re-tabled Budget 2023 with more allocation for spending.

Fixed Income – Major bond markets sold-off as market players readjusted their terminal rate expectations on US Fed Funds Rate.

Forex – USD outperformed during the month under review led by stronger-thanexpected economic data which restored the argument for interest rate to stay higher for longer in the US.

Other Markets – Concerns on higher interest rate in the US also sent global equities lower during the month.

Global Economy

Global: The International Monetary Fund (IMF) chief believes that there is evidence that the global inflation is subsiding and should improve the costof-living situation. As shown on Exhibit 2, inflation in major economies including the US, the UK and Euro Area are tapering down.

The IMF expects that the global inflation would slow from 8.8% in 2022 to 6.6% in 2023. Inflation in the Advanced Economies should be at 4.6% in 2023, but inflation in the Emerging Economies is expected to be higher at 8.1%.

United States: Several indicators continued to paint a robust picture for the US economy. This includes the labour market situation, where the unemployment rate fell from 3.5% in December 2022 to 3.4% in January 2023, the lowest since May 1969. Nonfarm payrolls also increased by 517K in January 2023, which is higher than 260K in December 2022.

Inflation remained stubbornly high at 6.4% in January 2023 (December 2022: 6.5%), and core inflation stood at 5.6% in February 2023 (December 2022: 5.7%). On the other hand, core PCE inflation, which is what the Fed pays attention the most, unexpectedly accelerated to 4.7% in January 2023 (December 2022: 4.6%). The latest minutes by the Federal Open Market Committee (FOMC) showed that policymakers are open to the higher interest rates than the current projections. Some policymakers favoured higher quantum of interest rate hikes to keep inflation in check. Due to this development, we now expect the Fed Funds Rate to peak at 5.50% this year with no expectation of a rate cut for 2023.

United Kingdom: While inflation situation in the UK improved, the level remains very well above the Bank of England (BOE)’s desired level. Latest inflation numbers showed inflation slowed down from 10.5% in December 2022 in to 10.1% in January 2023.

Cumulative interest rate hikes by the BOE earlier continued to affect economic momentum in the UK, where growth now had contracted by 0.2% q/q in 4Q2022 (3Q2022: 0.1% q/q).

Eurozone: Similarly, inflation in the Euro Area remained elevated, receding only slightly from 9.2% in December to 8.5% in January 2023, and core inflation remained at 5.2.

Growth also slowed down from 0.3% q/q in the 4Q2022 to 0.1% in the 1Q2022, avoiding from falling into the negative territory. The slower growth mainly led by escalated energy prices during the period.

Source: AmInvest Research - 3 Mar 2023