Snapshot Summary…

Global FX: DXY fell while other major currencies rose following milder-than-expected US inflation data

Global Rates: UST Market, Alongside With Gilts and Bunds, Rallied Post US CPI Report

MYR Bonds: The local government bond market saw continued improvements in prices at the short ends up to the belly of the curve

USD/MYR: Malaysian Ringgit and Other Regional Currencies Strengthened

Macro News

United States: Consumer inflation rate in the US slowed to 3.0% in June 2023 (May 2023: 4.0%), the lowest since March 2021. The slowdown is partly attributed to the high base effect from the previous year when energy and food prices surged, causing a spike in inflation. Energy costs dropped significantly, with fuel oil, gasoline, and utility gas service prices falling. Inflation also slowed for food, shelter, and various goods and services. The core inflation rate, excluding volatile food and energy prices, decreased to 4.8% (May 2023: 5.3%), the lowest since October 2021.

Japan: Producer prices in Japan increased by 4.1% in June 2023, marking the sixth consecutive month of slowing growth. Costs moderated in various sectors, while prices fell further in chemicals, petroleum and coal products, and non-ferrous metals. On a monthly basis, producer prices declined by 0.2% in June, the second consecutive month of decrease.

Malaysia: Malaysia industrial production (IP) for May 2023 grew by 4.7% y/y (April 2023: -3.3%). By sector, the manufacturing sector grew by 5.1% y/y (April 2023: -3.0% y/y), electricity grew by 5.0% y/y (-2.0% y/y), and the mining sector also grew by 2.9% y/y (April 2023: -4.9% y/y). By type of industry, the domestic-oriented industries led the improvement, growing by 10.1% y/y (April 2023: -2.1% y/y). Export-oriented industries grew by 2.8% y/y (April 2023: -3.5% y/y). This will be the sixth month where growth in the domestic-oriented industries outpaces the growth in the export-oriented industries.

Fixed Income

US Treasuries: US Treasuries rallied as the 10Y shed 11 bps to close at 3.86% after the June CPI surprised at lower than consensus expectations. Meanwhile, the Fed’s Beige Book for July described overall economic activity increased slightly since the May report but warns of slowing during the upcoming months. The 10Y UST fell 11 bps to 3.86%.

Other Major Bonds: In Europe, government bond yields also fell. The 10Y German bunds fell 7 bps to close at 2.58%. Spain data showed it was the first in the EU to reach the 2.0% inflation target as CPI fell to 1.9% y/y in June. UK 10Y fell 15 bps to 4.51%. The Bank of England latest bank stress test showed all banks passed.

MYR Government Bonds: The local government bond market saw continued improvements in prices at the short ends up to the belly of the curve. Risk Appetite was healthy ahead of the US June CPI release in which consensus was for core inflation to head slightly lower from 5.3% y/y in May. Elsewhere the market was getting ready for today’s new 10Y MGS benchmark reopening with WI last taken at 3.90%.

MYR Corporate Bonds: The local corporate bond market was boosted by the pickup in the govvies segment. Total traded volume hit RM473 million yesterday from RM332 million the day before. Activity was led by AA+ edotco 09/27 at 4.05% on RM110 million flows and AAA rated PLUS 01/29 at 4.07% on RM60 million flows. In the GG space, Danainfra 11/29 was last dealt at 3.90% on RM55 million volume.

Forex

DXY Index: Prompted by the milder than expected inflation, the dollar index fell further by 1.2% to end the session at 100.52 after it held steady at above 101.4-level level pre-inflation report. It marked the fifth back-to-back bearish trend as market players reassessed their US Fed rate hike outlook. Traders are pricing in the 25 bps rate hike in July meeting without any further increase for the rest of 2023, according to the CME FedWatch tool. Nonetheless, Richmond Fed President Thomas Barkin (non-voting) reiterated that the US Fed remained committed in bringing the inflation level back to 2.0%.

EUR: The euro rose 1.1% to 1.113, its highest level last seen in February 2022 supported by the risk-on mode and weakened dollar. As the inflation level in the Eurozone remained high compared to the US’s, the market is still anticipating the ECB to continue sticking to its tightening plan with 4.25% - 4.50% terminal main refinancing rate expected.

GBP: The pound climbed 0.4% to 1.299. In its latest financial stability report, the BoE highlighted that the UK banking system continued to be resilient to support households or borrowers that struggle with repayments amidst tight monetary policy and high living costs, even if the economic conditions turn out to be much worse that initially expected.

JPY: The Japanese yen remained on bullish trend, closing below 140-level for the first time since last May. On the inflation front, producer prices grew 4.1% y/y, falling short from market forecasts of 4.3% y/y. On monthly basis, the prices fell 0.2% m/m, marking second straight months of contraction, which put less pressure on headline consumer inflation and putting doubt on BoJ’s policy tweak expectation.

CNY: The Chinese yuan strengthened 0.6% to 7.166 as the PBoC set another day of stronger than expected yuan fixing at 7.176 (cons.: 7.191). Focus today will be on China’s June external trade data where export is expected to decline by 10% y/y (May: -7.5%) while imports to decline by 4.1% y/y (May: -4.5%), highlighting the shaky economic environment.

AUD: The Aussie dollar rose 1.5% to 0.679 on the back of risk appetite improvement. Speaking during an event, the RBA’s governor Philip Lowe warned that it is possible for further tightening to return the inflation to target despite the recent easing in headline monthly data (last spotted at 5.6%). Also, starting from 2024, the RBA board will meet eight times a year rather than the current practise of 11 times.

KRW: The Korean won strengthened 0.4% to 1,289. While the market is looking for the BoK to maintain its interest rate at 3.50% during today’s meeting, forward guidance by its governor Chang Yong Rhee may be scrutinized to gauge clearer picture whether the central bank will further hike its interest rate.

MYR: The ringgit firmed 0.2% to 4.652 and traded within the range of 4.647 and 4.657, in tandem with firmer yuan. The domestic’s industrial production unexpectedly improved to 4.7% y/y in May after it chalked up 3.3% contraction in the previous month.

Other Markets

Gold: Gold Prices Rose 1.3% to USD1,957/oz Due to Weaker Dollar.

Crude Oil: Oil prices traded in green as Brent jumped 0.9% to USD80 per barrel while WTI surged 1.2% to USD75 per barrel as improved risk sentiment helped support the price.

FBM KLCI: The FBM KLCI climbed 0.5% to 1,398. Detailed transactions showed that foreign investors were the net buyers with RM84.2 million flows, while being offset by the net buying flow from local institutions and retailers with RM39.8 million and RM44.4 million, respectively.

US Equities: Wall Street closed higher with Dow Jones rising 0.3% to 34,347, S&P500 gaining 0.7% to 4,472 and Nasdaq rising 1.2% to 13,919.

Source: AmInvest Research - 13 Jul 2023