Snapshot Summary…

Global Rates: Major global bond curves rallied following the US Fed meeting

MYR Bonds: Ringgit government bonds strengthened to follow global market rally

Global FX: The demand for the USD continue to dwindle amidst improvement in risk appetite

USD/MYR: The ringgit weakened slightly despite the weaker USD

Fixed Income

Global bonds : The 10Y UST rallied to below the 4.00% level (it was hovering near 5.00% in October), boosted after last week's FOMC meeting. On top of holding the FFR, the Federal Reserve updated its economic forecasts which included lower inflation outlook for this year and next, plus a median estimate of three interest rate cuts next year compared with only for two cuts as per its previous forecasts made in September. Fed chair Jerome Powell then said the committee discussed steps on when to reverse its tight monetary policy. However, Treasuries rebounded weaker last Friday, after NY Fed’s Williams told CNBC that the Fed has not talked about rate cuts, which is contrary to what the Fed chief signalled.

MYR Government Bonds: Strong performance was seen for Malaysian bonds on the heels of the UST rally and which aided the primary segment. The 10Y MGS reopening auction garnered firm demand at BTC of 2.21x for the MYR4.0 billion public tender which was in addition to MYR1.0 billion private placement.

MYR Government Bond View: Risk of mixed performance for MYR govvies is possible this week, after a modest reversal in the UST market last Friday and as the market quiets down for the year-end. Traders await the 2024 government securities auction calendar, anticipated this week. But the release is not likely to spur short-term interest amid the expected lack of activity. There should be a lower issuance of MGS and GII next year vis-avis this year, amid the lower fiscal deficit target for 2024.

MYR Corporate Bonds: Ringgit credits also strengthened, supported by the strong MGS performance. The net buying activity continued last Friday despite profit taking in the MGS market as credits lagged the govvies movement.

MYR Corporate Bond View: Similar to the govvies segment, we foresee a lack of interest ahead of the year-end. However, some support could come as some traders could pad up their books before the start of the coming year. Interest could flow into GG and AAA names where realignment is due, such as AAA rated PASB (Exhibit 2).

Forex

DXY Index: Amidst the US Fed policy meeting week, the dollar trended lower and could not find traction against the rate cut expectations from the market, despite the slight uptick in latest headline inflation number. On top of holding the FFR unchanged, based on the updated dot plot projections, policymakers are now looking at lower inflation and a median estimate of three interest rate cuts in 2024, compared with only two cuts in the previous estimate. This sent the DXY index to touch lows of below the 102-level by the end of Thursday as we saw the dollar’s broad sell-off. Risk appetite also improved as emerging market currencies and commodity prices went up throughout the week. Nonetheless, signs of a still resilient US economy were seen through the stronger growth of US retail sales and lower initial jobless claims. Hence, the dollar trimmed some of its losses on Friday, ending the week at 102.55.

Europe: The ECB decided to keep its benchmark interest rate steady with the main refinancing rate at 4.5%, and the deposit facility rate at 4.0%. In contrast with the US Fed’s hints for rate cuts, ECB policymakers did not discuss any rate cuts and said that future decisions will be based on incoming data. This is also in view of the still high inflation environment in the region. The EUR surged gained 1.2% to end Friday near the 1.10-level. Positive data flowing out from the region were also supportive of the EUR. The ZEW Economic Sentiment Index improved to 23.0 December from 13.8 in November and higher than market expectations of 11.2. In reaction to the steady unemployment rate and higher growth in wages, market players are looking for the BoE to stand firm in its hawkish stance for quite some time, in contrast with the Fed’s rate outlook. At the BoE’s policy meeting, the central bank maintained its interest rate at 5.50% with a majority vote of 6- 3. The remaining three voted for further rate hike. Taken all together, these factors were supportive for the GBP, chalking 1.1% gains against the dollar.

Asia Pacific: Investors now turn their focus towards the BoJ’s policy meeting this week amidst expectations the central bank will exit its negative interest rate regime soon on signs of sustainable inflation. The JPY surged 1.9% against USD to close Friday at 141.89. Data showed that sentiment among large manufacturers is upbeat in 4Q2023 as firms also plan to increase capital expenditure. The improvement in risk appetite also helped support the AUD, posting 1.8% gains against the USD though data released were mixed. The unemployment rate went up slightly but the number of people getting employed rose to 61.5K from 42.7K, beating the market forecast of 11K. Meanwhile, consumer confidence was held around pandemic-lows and business confidence dropped to its lowest level since 2012, reacting to the RBA’s interest rate increase. In China, CNY gains were capped as economic data released on Friday were mixed and investors remained pessimistic on China’s economic recovery.

Malaysia: The ringgit, could not take full advantage of the lower dollar as it closed Friday 0.1% w/w weaker. Investors remained cautious against the yuan (ringgit has a close correlation with the yuan) alongside concerns over China’s frail economy. This was despite Malaysia’s economic data in favour for the currency; industrial production grew at a faster pace of 2.7% y/y, beating market forecast of 2.4%.

Source: AmInvest Research - 18 Dec 2023