Snapshot Summary…

Global Rates: Bonds rallied in response to weak US data, which futures markets think set the stage for larger and quicker Fed rate cuts

MYR Bonds: Government bonds continued to be supported, and we foresee realignment on select GGs in the short-term horizon

Global FX: Persistent downside momentum for the DXY index

USD/MYR: The ringgit is poised for upside movement

Fixed Income

Global Bonds: Bonds rallied in response to weak US economic data, which markets think set the stage for larger and quicker Fed rate cuts starting this year. Non-farm payrolls were a low 114k in July against 175k consensus and 179k in June. In turn, the May NFP was cut by 2k to 216k and June cut by a larger 27k to 179k. Meanwhile, the ISM manufacturing PMI fell to 46.6 in July 2024 from 48.5 in June. In addition, Gilts surged as the BoE cut rates for the first time since early 2020 with a vote of 5-4, and traders are betting on two more rate cuts for the remainder of the year.

Malaysia Government Bonds: Malaysian government bonds also rallied as sentiment was aided by the global rally and the strength of the MYR. However, we noted some profit-taking pressure with some shortening of duration late last week in case of risk-off sentiment coming through amid the current volatility. The 10Y MGS rallied by 8 bps and the 3Y by a larger 10 bps while the 5Y IRS was down 9 bps to 3.41% with the 5Y MGS down 7 bps to 3.50% translating into a large 9 bps swap spread on the 5Y.

Malaysia Government Bonds View: Data this week will comprise the latest IPI, where the consensus expectation is for a larger 5.3% in June vs 2.4% in May. 2Q GDP is slated a week later, and the advance number was released late last month at a strong +5.8% y/y amid strong household consumption. MYR6.98 billion was withdrawn from Account 3 at the EPF. This week, we monitor the UST movement as a guide for the MGS movement.

Malaysia Corporate Bonds: Corporate bonds also moved firm, trying to catch up with the MGS gains on active flows, though average daily volume fell to MYR689 million from MYR811 million per day a week prior.

Malaysia Corporate Bonds View: Considering that MGS yields moved at a relatively larger pace last week vs corporate bonds, credit spreads (quasi to AA1 rated) widened slightly (by 1-2 bps on higher credits). On an RV basis, after the recent MGS and GII rally, we note GGs have the potential for some realignment, such as GG Danainfra, via swapping tranches on the bellies into shorter-dated papers with 4Y-7Y tenors (Exhibit 3-4).

Forex

DXY Index: The DXY index had a pronounced decline of 1.1%, leading it to reach its 4-1/2 month low. This significant drop was primarily driven by the release of the US July payroll report, which revealed disappointing figures. The report indicated weaker-than-expected job growth and a simultaneous increase in the unemployment rate, reaching a level not seen in 2-3/4 years. Furthermore, the report highlighted a slowdown in wage growth, with average hourly earnings showing the slowest annual increase in three years. These unfavourable indicators from the US economic data weighed heavily on market sentiment, resulting in market players starting pricing in a ‘hard landing’ scenario for the US economy and calling for more cuts. Consequently, the likelihood of the Federal Reserve implementing a rate cut gained traction, with expectations soaring to 100% for a 25 bps reduction at the upcoming September FOMC meeting. Additionally, there was a 71% probability of a 50 bps rate cut, further dampening the dollar's performance. The current heightened volatility and downside momentum for the DXY index could persist this week with the upcoming composite PMI, which could further soften the US economy.

Europe: The signalling of the September Fed rate cut sent the dollar lower and would translate into a beneficial upward drive for other currencies, considering the market longed for such hints following the Fed undertaking unprecedented tightening measures. While the euro and British pound were supposed to have a good week, it was not true for the GBP as the euro rose 0.5% on the week, but the GBP fell 0.5% on the same. This can be attributed to the BoE’s decision to cut its interest rate for the first time since the pandemic on Thursday, catching some market participants off-guard. The vote for the decision was tight at 5-4 and deemed ‘finely balanced’ as the risks of second-round inflation effects remain elevated. In the meantime, the Eurozone’s July inflation grew faster at 2.6% y/y compared with June’s 2.5% y/y and market consensus of 2.4% y/y, which builds up the case for the ECB to be cautious in cutting its key rates. This week, we may see more upside bias for the GBP and the EUR, reacting to market participants’ pricing of sharper Fed rate cuts.

Asia: We noticed that the USD/JPY pair posted the largest weekly drop since November 2022, owing to the surprise move to raise its key short-term interest rate to 0.25% from the previous target of 0% to 0.1%. This may cause the further unwinding of carry trades, which spells further appreciation of the JPY against the USD. Based on weekly data from CFTC (Exhibit 9), the number of contracts shorting the Japanese yen among speculators is dwindling fast, and we think the momentum will continue to be so moving forward. In China, the yuan also took advantage of the weaker dollar sentiment, rising as much as 1.0% on Friday to close the week at 7.172, its strongest level since early January. Meanwhile, the commodity-linked currencies AUD and NZD were somewhat mixed, with the former sliding 0.6% w/w while the latter managed to hold its ground and rose 1.2% w/w. This week will focus on the RBA’s fifth meeting of the year. The collective consensus is for the central bank to stay its course on restrictive policy while maintaining the cash rate at 4.35% as the inflation in Australia remains hot.

Malaysia: The Ringgit showed muscle throughout the week, extending the previous week’s trend of 2.0% appreciation within seven sessions. Last week in our report “July’s FOMC Meeting Review – Rate Cut on the Table

Source: AmInvest Research - 6 Aug 2024