Fixed Income

Global bonds : US Treasuries closed weaker last Friday, resulting in a mixed and rangebound close for the week. Friday’s UST movement resulted from better-than-expected economic data. However, the weekly UST movement was amid markets still unsure of a March 2024 Fed rate cut (WIRP stating around 50% probability of a rate cut). However, markets are almost pricing in 100% probability of a cut by the June 2024 FOMC. There was also caution in the UST market to end last week as we head towards the upcoming week’s FOMC meeting and the January NFP release.

MYR Government Bonds: Malaysian Government Securities (MGS) closed modestly firmer last week as Bank Negara Malaysia (BNM) held its policy interest rate unchanged, as expected. Additional support was provided by the firm movement in the US government bond space as US Treasury (UST) yields fell by about 5 bps w/w. For local bonds, the benchmark 3-year MGS fell 3 bps w/w to hover around 3.41%, while the 10Y MGS is down 2 bps to hover near 3.81%.

MYR Government Bonds View: Our view remains that the OPR would be kept at 3.00% till the end of the year with BNM to sustain the OPR at a supportive level. We note the 3Y MGS fell below 3.40%, seeing the large spread against the OPR; we think the 3Y MGS >3.45% remains an attractive buy-in level.

MYR Corporate Bonds: Malaysian corporate bonds posted gains alongside the better sentiment in the MGS/GII segment. However, the volume traded was more muted, as sentiment was guarded amid the local macroeconomic data release (December CPI) and MPC meeting last week.

MYR Corporate Bonds View: We foresee sustained support for select high-grade papers with a slant towards quasi-government and AAA-rated names. There’s an opportunity on high-grade papers such as Danainfra 02/33 and 10/33.

Forex

DXY Index: Though the dollar was supported by rising uncertainties about whether the Fed will cut rates by March, markets’ strong anticipation that the Fed will reduce interest rates by June this year meant the dollar direction last week was vulnerable to both sides: upward and downward. Nonetheless, the DXY index closed 0.1% higher on the week. We foresee sentiment for the US dollar to remain cautious ahead of FOMC this week and the January 2024 NFP release. This week, investors are looking to scrutinise the US Federal Reserve monetary policy decision due on Thursday night, looking for any hints of rate cut timing.

Europe: Amidst the dovish sound of the ECB post-meeting, the EUR fell 0.4% while the GBP was steady as it closed at the same level as last week’s at 1.270. Nevertheless, barring the gains versus a weak USD, the EUR currently looks vulnerable amid Eurozone growth risks and potentially earlier ECB rate cuts vis-à-vis the Fed. Last week, the ECB kept interest rates unchanged, and President Christine Lagarde said it was “premature to discuss rate cuts”. However, she noted that risks on economic growth are “tilted towards the downside”. The GBP was more supported than the EUR, as the BoE is expected to maintain rates for a tad longer than the ECB due to stickier UK inflation.

Asia Pacific: The yuan found some support during the week, going against the firmer dollar after the PBoC held its loan prime rate for one-year and five-year unchanged at 3.45% and 4.20%, defying market expectations of a cut. Also, the unexpected announcement of a 50bps cut on reserve requirement suggests strong support for the economy. At the same time, the Japanese yuan weakened slightly to close Friday at 148.15 amidst BoJ’s meeting week. The central bank maintained its policy rate and YCC parameters but also signalled that it could raise interest rates in the future. However, the details on the specific timing of when that could happen remain unclear. Due to slight risk aversion, the AUD and NZD declined by 0.3% and 0.4% w/w. Preliminary Composite PMI for Australia suggested a recovery in the manufacturing and services sectors for the first month 2024 despite the elevated interest rate. In New Zealand, the inflation rate in 4Q2023 grew slower at 4.7% y/y from 5.6% but generally aligned with market expectations. Also, the SGD was relatively stable and closed the week at 1.341. On the data front, Singapore’s December inflation came in at 3.7% y/y, a pickup from 3.6% y/y in the prior month and slightly higher than the market forecast of 3.5%.

Malaysia: For the ringgit, the price movement was rather subdued and tilted towards the weakening side, trading within the 4.71 – 4.74 level amidst a shortened working week. BNM’s decision to keep interest rates unchanged and the signs of still tepid inflation pressure in Malaysia may have pressured the ringgit vis-à-vis high interest rate levels in major economies. This week, we think ringgit remains vulnerable to the downside bias as traders may continue to be cautious ahead of Thursday night's US Federal Reserve monetary policy decision.

Source: AmInvest Research - 29 Jan 2024