Snapshot Summary…

Global Rates: Bonds rallied as Powell solidifies impending rate cuts

MYR Bonds: Onshore bonds remained supported post-Malaysia data and Fed direction

Global FX: Dollar extended its losses for five consecutive weeks

USD/MYR: Ringgit strengthened on the back of potential rate cut comments from Fed Chair Powell

Fixed Income

Global Bonds: US Treasuries rallied amid the dovish Fed and reductions in the 12 months’ NFP data up to March 2024. The FOMC minutes showed policymakers acknowledging progress towards the 2% inflation target. At the Jackson Hole symposium, Fed chairman Jerome Powell provided a near definitive signal of a Fed rate cut ahead, saying that "time has come for policy to adjust". BoE governor Andrew Bailey said he was “cautiously optimistic” about inflation but did not point to the timeline of the next rate cut – BoE having cut rates already this month.

Malaysia Government Bonds: Benchmark bonds were dealt firm and sustained past month’s gains. On top of the dovish Fed, MGS sentiment was supported by data. Malaysia’s exports surged 12.3% y/y, exceeding expectations of +9.0%, and +1.7% the previous month. CPI at 2.0% y/y in July marked the third month of the same growth rate while core CPI rose by 1.9% y/y, steadily rising for the fourth month. 10Y MGS real yields last week registered at 1.77%, down from 1.80% in May. Current 10Y real yield of 1.70%-1.80% is near average of past five years; hence decline in nominal yields in the short-term period is possible.

Malaysia Government Bonds View: We have started this week on firm note as USD/MYR dipped to 4.346 and quotes on the 10Y MGS within last week’s 3.77% close. BNM has announced reopening of MGS 07/34 which will be the new 10Y benchmark. Improved sentiment, shift to a new benchmark and potential for nominal yields to decline should boost demand for the auction. Tender at a large MYR5.5 billion brings total outstanding to MYR24.0 billion on MGS 07/34 and will be welcomed as it enlarges the trading liquidity. Tender closes 28 August.

Malaysia Corporate Bonds: Indicative PDS yields fell and firm MGS segment sustained the credit spreads. More active flows while a pickup in both AAA and AA names late last week should set up more interest in bonds this week if govvies are supported post the dovish Powell remarks.

Malaysia Corporate Bonds View: Current focus on high grades can check out medium-dated PLUS and PASB or longer tenor Air Selangor for investors preferring longer duration (Exhibits 3 and 4).

Forex

DXY Index: Last Thursday, the resilient US S&P Flash PMI data snapped the DXY Index’s (Dixie) prior to four straight days of bearish run. However, the run resumed on Friday after Federal Reserve Chair Jerome Powell remarked during last week’s anticipated Jackson Hole event on a likely first- rate cut during the upcoming September policy meeting. By the end of Friday, the Dixie closed at just above the 100-level, which is around its seven-month low. This also marked the dollar to extend its weekly losses for five consecutive weeks. The market is now pricing in around a 100-bps rate cut for the remaining three Fed meetings of the year, with one meeting slated for a 50-bps cut. However, we think the 50-bps cut is unlikely as the US economy is still steadily slowing down and not nearing any recession. This week, investors will look for Thursday’s 2Q2024 GDP 2nd estimate and Friday’s PCE Price Index data.

Europe: Data for the Eurozone released last week were somewhat mixed; the manufacturing sector in the region continues to be repressed, but improvement in services was enough to make it up. As a result, the S&P Composite Flash PMI improved to 51.2 in August from 50.2 in the prior month. On the other hand, the UK’s economy seemed to be firmer standing following its Composite PMI print, which went up to 53.4 from 52.8, beating the market forecast of 52.9. The diverging data explains why the GBP posted larger weekly gains at 2.1% w/w last week compared to the EUR gains of 1.5% w/w. There will be more data coming out of the Eurozone this week, including the inflation rate, which may dictate the ECB’s policy decision during the September meeting.

Asia: The yen firmed sharply by 2.2% w/w to around 144-level after Japan’s inflation remained unchanged at 2.8% y/y for the third month and above the 2.0% central bank target sustainably since April 2022. Its core inflation also rebounded to 2.7% y/y from 2.6% y/y, which, if taken together, would bolster the case for further rate hikes by the BoJ. Sure enough, BoJ Governor Ueda said last Friday that the central bank would continue raising interest rates if inflation remains on track to sustainably hit the 2% target. The Bloomberg WIRP function showed that the market is pricing in one more 25 bps hike by the end of this year. In the meantime, the CNY rose 0.5% w/w amidst the weak dollar. Early last week, the PBoC maintained the loan prime rate for both one-year and five-year at 3.35% and 3.85%, respectively, which may have supported the yuan. Nonetheless, the sentiment surrounding the Chinese economy continues to be on the sour side amidst structural challenges. Meanwhile, the risk-on mood also benefitted commodity-linked currencies such as the AUD (+1.9% w/w) and the NZD (+3.0% w/w).

Malaysia: The ringgit continued its three-month upward trend, closing the trading week at 4.37 against the US dollar, supported by recent developments. The key factor behind the ringgit's strength was Fed Chair Powell's speech, which suggested a potential rate cut in September. Additionally, Malaysia's export figures rose by 12.3% y/y, contributing positively to economic growth, even as the inflation rate remained steady at 2%. The ringgit also showed resilience against major currencies like the euro, British pound, and Singapore dollar. While it remains favourable to the ringgit, market participants are advised to stay cautious ahead of upcoming US economic data and Malaysia's PPI figures for a clearer outlook.

Source: AmInvest Research - 27 Aug 2024