Snapshot Summary…

Global Rates: Hawkish Feds signals to soften US bonds

MYR Bonds: Malaysian government bond closed weaker amid US PMI data and FOMC minutes

Global FX: Dimming prospect of early US rate cuts

USD/MYR: The US interest rate outlook projected a weaker ringgit to 4.71 per dollar by the end of the week.

Fixed Income

Global Bonds: US Treasuries weakened as traders reacted to economic data (including firm PMI data in the US and Eurozone) and hawkish Fed signalling. Earlier this month, US CPI rose less than expected in April and flat April retail sales. However, we have the US PCE inflation data for April this Friday. The consensus expectation for headline PCE is 2.7% y/y against a similar 2.7% y/y rise in March, while core PCE is anticipated at 2.8% y/y vs. 2.8% y/y the month before. PCE inflation remains stuck compared with the Fed's projection (released after the March FOMC), where the median forecast for 2024 headline PCE is 2.4% and core PCE at 2.6%. Last week's release of the most recent FOMC meeting minutes showed policymakers' concerns over inflation and whether more tightening is needed or that at least interest rates ought to be held higher for a longer period.

Malaysia Government Bonds: Last week, the UST remained weak, but after some retracement, it was lower from last month's highs (the 10Y UST was down 18 bps m/m though up 5 bps w/w). This remained a boost for the MGS market despite upbeat US PMI data released last week and the hawkish FOMC minutes. Meanwhile, the auction of the GII 15Y (09/39) was well received with a final BTC of 3.024x as players continued to support the back end of the curve, looking for yield pick-up.

Malaysian Government Bonds View: Up next in the govvies auction schedule is reopening the 7Y MGS (MGS 04/31). Last week, we suspect there was a trimming of holdings on MGS 04/31 ahead of the upcoming auction. This could signal a downside to the auction demand. Moreover, there's an outstanding amount of MYR24.5 billion in MGS 04/31 and MYR13.9 billion in MGS 06/31. Nevertheless, more yield upside on MGS 04/31 (including WI quotes) to bring spread against the 5Y MGS approaching 20 bps (7Y/5Y spread end of last week at 14bps) (Exhibit 2) should aid auction demand considering the already flat MGS curve currently. The previous MGS 04/31 auction was in February this year at MYR5.0 billion size, and BTC was healthy at 2.16x.

Malaysian Corporate Bonds: Ringgit credit spreads tightened last week as levels tried to catch up to the government rally. Tighter spreads were notableon lower-rated AA and A segments and on longer-duration papers, reflecting the overall risk appetite. Flows on non-AAA/GG space were led by infra and construction-related corporates such as MMC Corp, YTL Corp, YTL Power, Edra Energy, Malaysian Resources, SP Setia and UDA Holdings, as well as finance names MBB, CIMB, RHB, MNRB and Muamalat.

Malaysian Corporate Bonds View: For the coming week, we think with the risk of higher MGS due to profit-taking pressure, credit traders may focus more on higher-grade names. We think the focus may turn towards power— and water-related infrastructure names in the AAA space, led by Tenaga and Pengurusan Air papers.

Forex

DXY Index: On the week, the DXY rose 0.3% w/w, propelled by investors’ cautious mode after the prior week’s ex-dollar rally. The cautious mode was prompted by the US exceptionalism narrative, i.e., US economic data during the week came in better than expected, dampening the hope for an early US rate cut. The hope was sparked early this month when reports showed the labour market was easing, but the sentiment seemed to turn around after last week. At the point of writing, the CME FedWatch tool suggests that market players are eyeing at the first rate cut to take place in September, with a probability of slightly over the 50% mark. The US market will be closed on Monday due to the US Memorial Day holiday, but the focus this week will be on 2nd estimate of the US 1Q2024 GDP and the Fed-preferred inflation measure.

Europe: Meanwhile, the EUR was under pressure by the firm dollar and the ECB is expected to trim its multi-year high interest rate in June and was “confirmed” by dovish comments from ECB President Lagarde, who said there is a "strong likelihood" of an ECB interest rate cut in June. This view is seconded by ECB Chief Economist, Philip Lane. The euro did react mutely despite the flash Composite PMI for the Eurozone, which recorded faster growth among private businesses with slower contraction seen in the manufacturing sector. On the other hand, the GBP was partly supported by the upside surprises in the UK’s inflation concerning the global market of resurfacing inflationary pressure. UK’s headline inflation grew 2.3% y/y, faster than market expectations of 2.1%, while core inflation grew 3.9% y/y (cons.: 3.6% y/y). The currency closed the week higher by 0.3% w/w at 1.274 to go along with the surge in Gilts yields as market players started to reduce the BoE rate cut outlook. The bias for the GBP this upcoming week seems to be tilted sideways or even upside.

Asia: The JPY lost its ground last week, succumbing to the delayed Fed rate cut expectations. The yen dropped 0.9% to close the week at 156.99. On Friday, top currency official Masato Kanda renewed warnings against yen-bears, saying that authorities are ready to take “appropriate” actions to counter excessive moves in the yen, hinting at another yen intervention soon. At the same time, the yuan traded lower following the PBoC fixed the yuan’s daily reference rate to be weaker towards the end of the weak, signalling the central bank’s willingness to let the yuan eased. Also, the central bank kept the one-year and five-year loan prime rates unchanged at 3.45% and 3.95%, respectively, amidst the “higher-for-longer” US narratives. Meanwhile, the AUD and NZD posted losses, led by the former with a deeper fall at 1.0% w/w vs. the latter at 0.2% w/w. The RBNZ, in Tuesday’s meeting, decided to maintain its cash rate at 5.50% and communicated a hawkish tone as the committee agreed to keep the interest rates at restrictive levels to bring the inflation down. According to its latest forecast projections, the cash rate will only be cut by 4Q2025. SGD was also on the downside, falling 0.4% w/w.

Malaysia: The ringgit entered the week at a sub-4.69 level before it weakened to 4.71 per dollar by the end of the week. While the gains made by the ringgit from the prior week can be attributed to the authorities’ coordinated efforts in propping up the currency, last week’s losses resulted from the market’s readjustment of the US interest rate outlook. Investors were also cautious after Malaysia’s export data on Monday grew slower than the market expected, and the inflation rate was unchanged for the third straight month at 1.8%. Technical-wise, the USD/MYR pair now has crossed above the 200-day SMAVG line and will start to cross the 100-day SMAVG line this week if conditions continue to favour the dollar. The MACD line is seen to recover from the negative zone, highlighting a turnaround on the pair.

Source: AmInvest Research - 28 May 2024