Snapshot Summary…

Global Rates: Treasuries rallied as data and Fed-speak signal the rate hike cycle may be over

MYR Bonds: Ringgit government bonds strengthened but by a much smaller margin vs global bond

Global FX: The USD fell further as expectations for the Fed to start cutting rates by sooner than expected are increasing

USD/MYR: The ringgit firmed further amidst the lower demand for dollars

Fixed Income

Global bonds : Treasuries rallied as data and Fed-speak, particularly from Powell, signalled that the rate hike cycle may be over. The market piled on anticipation of earlier Fed cuts next year (by March as per WIRP vs by mid of the year in previous estimates). Powell suggested that the 'restrictive territory' of Fed's policy is slowing economic activity. As for data, these include the flat monthly PCE in October, vs +0.4% in September. On tap this week is the November non-farm payrolls where consensus is +180K vs +150K in October, and the monthly unemployment rate (anticipated at 3.9%). One major factor to note is that for every US recession since the 1950s, each had been preceded by the bottoming out in the unemployment rate. Bunds and Gilts also rallied, especially brought on by weak data, including the eurozone inflation at +2.4%, the lowest since July 2021.

MYR Government Bonds: Ringgit government bonds strengthened but by a much smaller margin vs global bond. Essentially, profit-taking actions intersected with net buying flows. One major factor to the smaller MGS gain, in our opinion, is that BNM is widely anticipated to hold the OPR next year whilst global central banks may undertake large rate cuts. The spread between the 10Y MGS over the UST is around -40 bps, or down from -80 bps over a month ago, while the average spread between the two, over the past year, was -4 bps. We think this contributed to the hesitant MGS move in the past week, and as we noted that MGS yields had already fallen 20-30 bps in the past month. There is no pertinent Malaysia macro data due this week; thus, focus turns towards the NFP.

MYR Government Bond View: Considering the above factors, we anticipate MGS vs UST spread to largely sustain near current levels. Aside, up next in the primary segment is reopening of current 5Y MGS (MGS 04/28), which should come up to a total issue of MYR5.0 billion. Demand should be decent due to onshore support.

MYR Corporate Bonds: Trading in ringgit credits was firmer, due to the hunt for yield pickup. There were still hints of profit-taking activity, but this was outweighed by the overall firm interest.

MYR Corporate Bond View: Despite the lower PDS yields last week, our calculations of Z-scores have increased more for shorter tenors vis-a-vis longer tenors, as well as more for higher grade GG's and AAA's vis-a-vis AA's and single-A's. Hence, we think that risk appetite remains healthy but there is caution on shorter tenor and higher grade papers, considering their tighter spreads. We note some shorter tenor GG Prasarana yields are hovering above longer tenors (Exhibit 2).

Forex

DXY Index: The dollar index posted another weekly loss albeit by a smaller quantum at 0.1% w/w (vs. 0.5% w/w previous week) as the expectations for a sooner-than-expected US Fed rate cuts are increasing. The CME FedWatch tool is showing the market is expecting the Fed to cut its interest rate by the March 2024 FOMC meeting - earlier than previous expectation of May 2024. On the data front, while the second reading of the 3Q2023 GDP suggested the US economy is on firmer footing, more timely data such as ISM manufacturing PMI and personal spending showed deterioration in economic activity. On Friday, the US Fed Chief Jerome Powell’s statement sounded less - hawkish as he said that the risk of under- or over-tightening is now more balanced.

Europe: The EUR could not take advantage of the subdued dollar demand as it fell 0.5% w/w to close the week at 1.088. This is after the Eurozone’s inflation for November fell to 2.4% y/y from 2.9% y/y in the prior month and less than market forecast of 2.7%. Core inflation also grew slower at 3.6% y/y (Oct: 4.2% y/y) vs. consensus 3.9% y/y. On the other hand, the GBP rose 0.8% w/w. The final S&P Global/CIPS Manufacturing PMI was revised higher to 47.2 from the initial estimate of 46.6.

Asia Pacific: Subdued dollar demand sent USD/JPY lower, retreating further from the multi-year highs reached early November. The JPY strengthened 1.8% w/w to close the week at 146.8-level. Data showed Japan’s industrial production grew faster at 1.0% m/m in October, compared to market forecast of 0.8% m/m and prior month’s 0.5% m/m. However, BoJ board member Toyoaki Nakamura played down the chance for a near-term end of its negative interest rate policy. In the meantime, the CNY firmed marginally by 0.3% as the market was not convinced by the unexpected pickup in manufacturing output, taking cue from the Caixin Manufacturing PMI. Gains made after the data released were erased as the currency remained hovering around the 7.14-level. Amidst risk-on environment, the AUD and NZD both surged 1.4% w/w and 2.2% w/w. Gains on the AUD was capped following slower-than-expected growth of monthly CPI indicator. At the same time, both consumer and business confidence in New Zealand surprised to the upside, highlighting the resiliency of New Zealand’s economy.

MYR: The ringgit firmed 0.3% w/w amidst lower dollar demand though ringgit’s performance was relatively passive compared to regional currencies. Malaysia’s producer inflation continues to suggest tame price pressures in Malaysia vis-à-vis major economies. The PPI declined 0.3% y/y, a sharp retreat from the post pandemic peak of more than 10% y/y growth. Coupled with the need to accommodate domestic growth, we continue to posit for the OPR to stay at 3.00% in 2024. On another note, the BNM governor said the current OPR level is slightly accommodative and appropriate for the economy, adding that policymakers will place domestic considerations, including inflation and growth, in deciding on rates and will be less pressured by the need to attract inflows.

Source: AmInvest Research - 4 Dec 2023