Snapshot Summary…

Global Rates: UST yields fell >10 bps on soft CPI data release and Fed rate cut expectations

MYR Bonds: Malaysian government bonds were supported given the UST gains

Global FX: USD lower meant most of the other major and emerging market currencies went up

USD/MYR: The pair dropped to reach its lowest level since January this year

Fixed Income

Global Bonds: US Treasuries and European yields rallied in response to the Fed's target of cutting interest rates. Market participants noted that Fed chair Powell’s comments turned dovish ahead of the US CPI and PPI data release last week. The US CPI unexpectedly fell to 3.0% y/y in June (+3.3% in May), while core inflation marginally declined to 3.3%, lower than the previous month of 3.4%. Softer CPI data and weak consumer confidence dragged the UST yields down even though the PPI rose 0.2% m/m in June, higher than expectations of 0.1%. Longer-tenor UST is more likely to take pole position as it is considered a good value in a cooler inflation environment. 10Y UST tumbled 10 bps, lower than 2Y UST at the end of the week.

Malaysia Government Bonds: Bonds modestly strengthened with yields on benchmark papers down 1-4 bps, led by GIIs and in the IRS segment, driven by gains in global bonds. Last week, the July BNM policy meeting had a muted impact on MGS; yields have already risen post-May MPC meeting, given BNM’s warnings over inflation arising from more subsidy rationalisation announcements in the future, mainly if these include changes to RON95 fuel. Meanwhile, the new 10Y benchmark GII 11/34 auction was well received, with the final BTC at 2.422x as players continued hunting for yield pick-up.

Malaysia Government Bonds View: We maintain that it is still too early for BNM to signal a change in direction to monetary policy due to the need for more details on subsidy rationalisation. Thus, we foresee short-term support for onshore bonds to remain via follow-through interest from global bond trading, given the raised outlook for global rate cuts.

Malaysia Corporate Bonds: Aided by the improved global sentiment, last week saw indicative PDS yields declining. Credit spreads tightened as these were larger than the movements in MGS yields. We also saw yields rising on select single-A rated names, but we attribute these to post-mark-to- market activity.

Malaysia Corporate Bonds View: Trading opportunities remain for select AAA names. This week, we see Pengurusan Air Selangor (PAIRSE Corp) with maturity 09/37 at 4.10% looks slightly attractive versus 07/37 last at 4.06% as well as Pengurusan Air 10/38 at a similar 4.10% (Exhibit 2). At the end of June, Air Selangor reported that its 2023 revenue stood at MYR2.82 billion versus MYR2.45 billion in 2022. In January this year, ahead of the water tariff hike of an average of 22 sen per cubic metre starting February, RAM Ratings said Air Selangor's revenue for 2024 will grow to MYR2.70 billion, and we note which is already surpassed by the 2023 revenue number.

Forex

DXY Index: The dollar gave up its early week’s support after Fed Chair Jerome Powell’s testimony in front of the Senate and House, reiterating a sort of ‘neutral’ stance; not saying exactly when the central bank will cut but the next move will not involve any raise of FFR. The greenback continued the dip later on, touching our first support level at 104.47 on Thursday amid an unexpected US inflation data drop, leading to expectations of multiple rate cuts later in the year. The week it was closed, the dollar almost hit our second support level at 104.00 as the consumer sentiment index unexpectedly slumped despite the release of stronger PPI data. Market participants should remain cautious following the assassination attempt on former US President Donald Trump over the weekend and possible yen intervention that could prompt market instability this week.

Europe: Currencies in the region exploited the USD weaknesses as the EUR rose to its highest level since early June, and the British pound closed near its almost one-year high last week. Amidst heightened political uncertainty in France, where a new Prime Minister has yet to be elected (current PM Gabriel Attal is asked to stay on for now), gains on EUR were limited. However, the GBP posted larger advances due to 1) the anticipation that the BoE will take a more measured pace in easing monetary policy vis- à-vis the ECB. 2) hawkish-tilted remarks from BoE officials from BoE Chief Economist Huw Pill and board member Catherine Mann last week. And, 3) the upside surprise in the UK’s May GDP growth, beating market expectations by 0.2 percentage points, suggesting the BoE could have further leeway in holding off its interest rate cut plan. More data this week coming out of the UK means the GBP is bound to face heightened volatility in the short term.

Asia: Asia-Pacific currencies rallied broadly against the USD last week amidst more market players betting on sooner and more rate cuts by the US Fed this year. Nonetheless, some Asian currencies also found an upward drive from domestic factors. The USD/JPY dropped sharply on Thursday as news outlets reported suspected intervention by the Japanese government and the BoJ. The sharp fall coincided right after the lower US CPI reading was released, dropping past the 160 level from 161 to dip to an intraday low of 157. Japan’s top currency diplomat, Masato Kanda, refused to comment further on whether the move was indeed an intervention by officials. In the meantime, the yuan also firmed in China, albeit the pace is subdued compared to other regional currencies. China’s economic data released last week suggests the economy faces further risk of deflation and delayed private consumption recovery. Interestingly, the NZD fell 0.4% on the week despite a weaker dollar as the RBNZ dropped its hawkish stance and signalled greater confidence that inflation is converging into its target, which ramped up bets on sooner rate cuts by the central bank.

Malaysia: The Malaysian ringgit showed resilience and strength against the US dollar as events like Fed Powell’s speech and US CPI release supported the ringgit's performance. The trend continued midweek as the ringgit grew to its lowest level since early June. Thursday marked a significant milestone as the ringgit strengthened to its highest level since January 2024, also supported by the BNM MPC meeting, where the benchmark OPR was kept steady. By Friday, the ringgit reached 4.709 against the US dollar amid expectations of rate cuts in the US. We posit that the ringgit could ride on further momentum to rally this week if the US economy continues to show a softening trend. Malaysia’s export data and the GDP advance estimate will be released on Friday in favour of Malaysia’s economy.

Source: AmInvest Research - 16 Jul 2024