Snapshot Summary…

Global Rates: UST market extended its gains despite late weaknesses

MYR Bonds: MGS market performance was mixed although monthly gains of 10-20 bps remained intact

Global FX: Continuously falling inflation in the US pushed dollar demand lower

USD/MYR: Ringgit performed well, taking hints from the weaker USD demand

Fixed Income

Global bonds : UST market maintained its gains for the week despite late weakness. The market also maintained gains seen since the start of November, which were aided by the Fed's decision to hold rates and traders' view that the Fed is done hiking, as well as the release of weak global data (e.g., NFP). In any case, past week saw more weak data, including US weekly jobs figures, Japan's 3Q2023 GDP, Eurozone CPI and UK GDP and retail sales. Bond rally was especially seen mid-week when the US headline CPI was unchanged on a monthly basis in October vs +0.4% the prior month.

MYR Government Bonds: Though past week's movement was mixed, the gains recorded in the past month where yields had fallen 10-20 bps m/m remained intact. UST yields down below 4.40% provided support. However, a sudden upward movement in UST yields mid-week sent MGS trading into a cautious mode with traded flows thinner. There was little reaction to the final reading of the 3Q2023 GDP at 3.3% y/y.

MYR Government Bond View: We have the October Malaysia CPI on tap this week. Consensus expectation is for a continued subdued number, of +1.9% y/y against a similar +1.9% y/y in September. Assuming the actual number is in line with consensus, and if UST strength persists, we anticipate continued bids in the MGS space. Look for the 10Y MGS to maintain near 3.85% assuming the 10Y UST remains below 4.50%, which translates into UST-MGS spread of 65 bps, vs current spread of 60 bps and past month average of 71 bps.

MYR Corporate Bonds: Ringgit corporate bonds closed slightly firmer though there were intra-week episodes of profit taking activity. Indicative credit spreads were modestly narrower where downward yield movement was slanted along longer tenor and lower grade papers, reflecting the better risk appetite but also search for higher yields.

MYR Corporate Bond View: We do not discount the risk of more profit taking this week, but we also note that credit spreads have widened at a fair pace in the past month. Indicative spread on 5Y AAA vs 5Y MGS is about 46 bps, up from <30 bps in middle of last month and vs average of 45 bps in past six months. Higher grade papers including quasi names may still be at risk of more realignment, such as on GG Danainfra (Exhibit 2).

Forex

DXY Index: Bearish dollar last week benefitted other currencies and could provide initial picture of what may come next year when we expect the dollar to sustain weakness and reflecting more soft patches in the US economy and recessionary concerns. The DXY index reached as low as 103.81, the lowest level since late August 2023. The sharp dollar sell-off was driven by US inflation data which showed a continuously slowing down trend and beating market expectations on both headline and core CPI. Nevertheless, relatively healthy retail sales ex gas/auto trimmed USD losses and provided some support. This week, among data/events under the radar are the Fed’s November meeting minutes and Flash S&P PMI for November 2023.

Europe: The common currency surged 2.1% last week. The larger contractions in industrial production for the Eurozone may cap the gains as any bad news coming out from the region may place pressure on the ECB to readjust its monetary policy. Nevertheless, ECB President Christine Lagarde reiterated that the current level, if it were to hold long enough, could bring inflation rate to 2.0% target over the medium term. In tandem, the GBP also trended higher, gaining 1.9% to 1.246 as USD demand dwindled. UK data released last week were roughly mixed, wages growth beat market forecast on one hand, while inflation rate grew slower on the other. On Friday, recessionary concerns in the UK grew louder as retail sales ex fuel unexpectedly declined by 0.1% m/m in October 2023 after 1.3% m/m drop in the prior month.

Asia Pacific: Lower dollar demand renders Japanese yen to retreat from the 23-year low it reached recently when the ‘higher-for-longer’ narrative was at its peak. The JPY firmed up 1.2% w/w to settle at below 150-level, by the end of Friday. However, the currency was pressured by the unexpectedly large contraction in GDP reading for 3Q2023, which clouded the economic prospect for the country. Also, Japan’s producer inflation declined faster in October, which may challenge BoJ’s plan to rollback its ultra-accommodative monetary policy stance. Amidst risk-on mode, the AUD surged 2.4% w/w. Speeches from RBA’s policymakers helped prop up the Australian dollar as they warned that inflation may decline in a more gradual manner than previously thought and that the inflation fighting process would be a “drawn-out” one, signalling that a further rate hike by the central bank remains on the table. Another factor that helped the AUD was the better-than-expected China economic data, including new yuan loans, industrial production, and retail sales. In China, the CNY firmed up 1.2% w/w, benefitting from rising bets of the Fed has already reached the end of its rate hike cycle.

MYR: Emerging currencies took advantage of the lower dollar, including the ringgit, albeit its performance was relatively tepid, which translates into subdued performance along the crosses. The USD/MYR pair fell 0.6% to close Friday at 4.681. The market’s reaction towards Malaysia GDP data on Friday was relatively muted despite report showed 3Q2023 GDP’s growth is healthier vis-à-vis 2Q2023 growth of 2.9% y/y and beating market median forecast of 3.2% (forecast range: 1.7% - 3.5%) provided by 14 economists surveyed by Bloomberg. This week, we posit that as more economic weaknesses shown on US Flash S&P PMI, alongside less hawkish tone in the meeting minutes, there will be upside potential for the ringgit.

Source: AmInvest Research - 20 Nov 2023