Snapshot Summary…

Global FX: The dollar closed relatively unchanged on the back of declining treasury yields

Global Rates: UST bull steepened, indicating sooner Feds rate cut

MYR Bonds: Govvies traded mixed despite strong demand in short-term tenors

USD/MYR: Ringgit anticipated to strengthen following a Fed cut in September

Macro News

Japan: Japan's core CPI increased by 2.2% y/y in July 2024, marking the third consecutive month of acceleration. This growth supports the argument for the central bank to move forward with policy normalisation. The Bank of Japan is anticipated to deliberate on the possibility of raising interest rates at the upcoming policy meeting next week to protect the yen and address inflationary pressures. In the meantime, headline inflation decreased to 2.2% y/y in July 2024 from 2.3% in the previous month.

United States: The US PCE index saw a slight 0.1% m/m increase in June 2024, following a steady reading in May. Services PCE inflation increased by 0.2% m/m, while the cost of goods decreased by 0.2% m/m. In contrast, the core PCE index experienced a 0.2% m/m rise, surpassing the 0.1% increase in May. Food prices rose by 0.1% m/m, while energy prices dropped by 2.1% m/m.

The University of Michigan consumer sentiment for the US was adjusted upwards to 66.4 in July 2024 from an initial reading of 66, although it still marked the lowest level in eight months.

Fixed Income

Global bonds: The UST bull steepened last Friday following the broadly in-line Fed- preferred inflation gauge, solidifying the market’s expectations for the Fed’s first rate cut to happen in September. The yields generally came down across the curve, with shorter end 2Y falling around 4.8 bps and ultra-long end 30Y shedding around 3.1 bps. The lukewarm PCE figure also supported the Bunds and Gilts curve to post a decent upside on Friday, completing weekly gains.

MYR Government Bonds: The MYR bond market traded mixed while flows were seen as heavy in bidding for short-term tenors given the already flat sovereign yield curve and expectations that the Fed may cut earlier than expected. Meanwhile, we also saw some profit taking in 5Y MGS following the recovery seen in IRS, with 5Y IRS rebounding by circa 3 bps. On the UST space, it was trading within a narrow range during the Friday Asia Session, given mixed economic data from the Thursday night session.

MYR Corporate Bonds: PDS volume flow still seems healthy, with gainers outpacing losers. Among notable trades were MYR20 million on Danainfra 03/37, done at3.953%, MYR40 million on Johor Corp 06/27 (AAA), done at 3.918%, and MYR40 million on UEM Sunrise (AA-), done at 3.902%.

Forex

United States: The dollar closed relatively unchanged on Friday, influenced by a decline in Treasury yields following a mild US PCE index report. Investors noted that this report maintained the path for the anticipated easing by the Federal Reserve in September.

Europe: The GBP was about 0.12% firmer on Friday near 1.287 but below the one- year high of 1.304, which was seen in mid-July, as the market was split near the 50% probability whether the BoE will cut rates at its policy meeting this week. Meanwhile, the EUR was strong and gained against the USD amid the release of the US PCE inflation data.

Asia-Pacific: The CNY fell on Friday as it retreated from a two-month high, even though the USD found little support to lift itself out of the 104.3-104.5 range. Adding to CNY's weakness was the PBoC reducing its one-year medium-term lending rate by 20 bps to 2.30% the day before. The cut was the largest since April 2020. Meanwhile, the PBoC set the USD/CNY fixing at 7.1270 or about 0.1% below Thursday's fix, and suggested the central bank was not trying to support the CNY when Reuters estimates were for a 0.6% lower fix. Ahead of the BoJ policy meeting this week, the JPY found support through off-recent highs. The BoJ expects to offer a hawkish stance this week, which has eased JPY's carry interest with the anticipated Fed rate cut in September reinforced by the tame US PCE release on Friday. The AUD remained steady amid the lack of USD support and before monthly retail sales and inflation data this week, though expectations are for the CPI to show a lower 3.8% in June vs 4.0% in May.

Malaysia: Increased bets that the Fed would cut its interest rates starting quarter ensured MYR strength. If the USD continues to hover near the 104.0-104.5 level in the coming few days, then we should expect MYR support to continue alongside it.

Other Markets

Gold: Gold rebounded by 1.0% to 2,387 USD/oz following a softer core PCE index data.

Crude oil: Oil plunged while traders assessed Chinese demand against falling US stockpiles.

Source: AmInvest Research - 29 Jul 2024