Snapshot Summary…

Global FX: Dollar rose as global market trims the Fed rate cut expectations

Global Rates: Weakness in global major bond markets was led by the Bund, Gilt and later into the 7Y UST auction

MYR Bonds: The local bond market weakened by 1 – 3 bps across the MGS curve

USD/MYR: The ringgit was also pressured alongside other Asian currencies yesterday amid the dollar support

Macro News

Australia: Australia's monthly Consumer Price Index (CPI) rose by 3.6% y/y, slightly up from 3.5% in the previous month and exceeding expectations of 3.4%. This marked the highest level since November, primarily driven by increased food and non-alcoholic beverage prices, notably fruits and vegetables. Additionally, prices rose for health, alcohol and tobacco, communications, and clothing & footwear. However, prices declined for recreation and furnishings. Excluding volatile items and travel, the CPI increased by 4.1% in April, consistent with March's pace. Inflation surpasses the Reserve Bank of Australia's 2-3% target range.

Japan: Japan's consumer confidence index fell to 36.2 in May 2024 from 38.3 in the prior month. The drop was more than expected, to its lowest level in seven months. Looking deeper, the indicator measuring households' willingness to buy durable consumer goods, income growth, overall livelihood, and employment also declined. At the same time, more consumers expect their prices to increase.

Fixed Income

Global bonds: The ‘higher-for-longer’ sentiment from the Tuesday session was drawn out into the overnight session, and we saw major bond markets had weak performance led by the Bunds curve as its yields surged 4 – 10 bps across the tenors after Germany’s harmonised inflation grew faster than expected This prompted the market to bet on the ECB to slow the pace of monetary policy easing. The sentiment also spilt over to the UK as the Gilts bear steepened, sending the 10Y yield to 4.400%, the highest level since last November. Further, the sentiment was dragged into the UST market, which caused the 7Y auction to soften and sent yields on the belly-to-long end- part of the curve higher, with the 10Y yield rising 6 bps to 4.612%. We think the market noted, especially from Minneapolis Fed’s Kashkari statement on Tuesday, that rate hike talks are still on the table.

MYR Government Bonds: The local bond market weakened by 1–3 bps across the MGS curve following the 10Y UST yield elevated by more than 8 bps overnight. In the primary space, the appetite for auction for reopening of MGS 04/31 yesterday was generally weak, with final BTC below 2X and the average rewarded level was 2.2 bps above the last done WI level (3.830%) prior to the auction, indicating that the fear of ‘higher for longer’ has once again weighed on the risk-on sentiment.

MYR Corporate Bonds: Flows in the PDS market declined to MYR433 million as cautious mode overwhelmed the market. Nonetheless, we continue to see buying interests outpace sell-off trades. Among notable trades were MYR10 million on 03/29 Toyota Capital (AAA) at 3.989%, MYR10 million on 10/24 Edra Solar (AA2) at 3.837%, and MYR10 million on 09/28 UEM Sunrise (AA-) at 4.016%.

Forex

United States: The dollar index climbed 0.5%, reaching a two-week peak and quickly backing up from weekly lows. Stronger-than-anticipated results from the May Richmond Fed manufacturing outlook survey supported the dollar. Underlying dollar support remains based on expectations that the Fed will not alter policy at its June and July meetings and will only consider rate cuts later this year. That being said, US PCE data, the Fed’s key inflation measure, is out this Friday and is eagerly awaited by FX and bond markets.

Europe: The EUR remains pressured amid the USD strength, and EUR/USD was trending below its 100D MA as confidence for higher for longer US rates persisted. Ahead of the ECB meeting next week, where markets are bracing for a rate cut, Germany reported that its May flash CPI rose 0.1% m/m (consensus 0.2%; April 0.5%), but increasing 2.4% y/y, within expectations and above March rise of 2.2%.

Asia-Pacific: Most Asian currencies continued to be pressured yesterday as the USD surged. The CNY fell amid the market bids for the USD, even as Reuters reported that state-owned banks supported China’s currency by buying it offshore and converting it into the CNY in the spot market. The PBoC set the midpoint rate for the USD/CNY at 7.1106, versus 7.1101 the day before and its weakest level since January, but this was over 1,400 pips stronger than Reuters' estimate. USD/CNY was seen near 7.2490 late yesterday. Meanwhile, the JPY also fell amid the USD strength, as did the AUD, even as data showed Aussie inflation had risen to a five-month high in April. The CPI rose 3.6% y/y in April versus 3.5% in March and 3.4% consensus expectations.

Malaysia: The MYR was also pressured alongside other Asian currencies yesterday amid US strength. We think sentiment for the local currency will remain downcast as we approach Friday’s US PCE inflation data release. The USD/MYR pair rose 0.3% to close yesterday at 4.705.

Other Markets

Gold: Gold lost its ground from its recent peak as the ‘higher-for-longer’ mode overwhelmed the market, trimming the Fed rate cut expectations. Its price fell 1.0% to USD2,338/oz.

Crude oil: Oil prices fell as sustained anticipation of the Fed’s higher-for-longer perspective pressures the oil demand outlook. This was despite anticipation of firmer summer demand for fuel usage for automobile driving. Brent finished the day 0.7% lower at USD84 per barrel, while WTI ended 0.8% lower at USD79 per barrel.

Source: AmInvest Research - 30 May 2024