Snapshot Summary

Global Rates: Bonds rally as players prepare for anticipated Fed and ECB cuts this month

MYR Bonds: We think bonds remained supported but will likely be guided by the UST movement as we move towards the September FOMC

Global FX: The dollar consolidates within the 100.50 - 102.00 range ahead of the September rate cut

USD/MYR: Ringgit trimmed its prior week's gains amid a widely expected OPR decision by BNM

Fixed Income

Global Bonds: A strong rally for the week for US Treasuries and ending with the 10Y/2Y spread back to positive territory. The 10Y UST fell 20 bps w/w to 3.71%, while the 2Y UST fell 27 bps to 3.65% for a +6 bps spread vs. -1 bps the previous week. Key to the decline in yields was the August non-farm payrolls lower than expected at +142k versus +165k expectations. The July NFP was revised to +89k from +114k. However, the unemployment rate fell to 4.2% from 4.3%. The market remains slanted towards a 25 bps Fed rate cut this month, though futures pricing suggests a 39% probability of a 50 bps cut as we began this week. Also aiding UST was Fed Governor Waller, who was 'open-minded' towards a larger rate cut. Bunds and Gilts rallied to trend with the UST and the ECB meeting in the coming week when markets expect a 25 bps cut to 3.50%. Look out for US CPI and retail sales this week.

Malaysia Government Bonds: Benchmark MGS papers fell 2bps w/w along 5Y-15Y tenors while others were flat, including the GII segment. BNM's act to hold the OPR and, in our opinion, a neutral bias in the MPC statement, ensured a lack of reaction in the MGS market post-meeting.

Malaysia Government Bonds View: MGS yield movements in the past week suggest sentiment remained supportive for bonds. However, flat yields on select benchmarks hint at cautious trading before last Friday's NFP and FOMC this month. There should be more support for the MGS this week, as the UST is on firm footing. However, key events will be the US CPI and retail sales and the ECB meeting as a guide for bond trading this week.

Malaysia Corporate Bonds: A modest fall in PDS yields last week and sustained credit spreads reflect a still upbeat onshore credit market. In the primary segment, pricing remains competitive, such as last week's Pelaburan Hartanah (AAA) 5Y at 3.77%, which is tighter than the AAA curve.

Malaysia Corporate Bonds View: Despite the recent rallies, some opportunity remains on select GG's, specifically 6Y to 10Y Danainfra/Prasarana, in our opinion (Exhibits 3-4).

Forex

DXY Index: As market players have fully priced in for an imminent 25 bps rate cut, the dollar movement last week still could not break the 100.50 - 102.00 range, signalling technical consolidation. We think that when the Fed cuts its rate next week during September's policy meeting, the bias for the dollar may be towards the downside. During the week, the DXY index shed 0.5% to close at the 101.2 level. Last week's non-farm payroll and unemployment rate data showed a mixed picture, suggesting a gradual cooling of the labour market, helping the argument for the Fed to execute smaller rather than big cuts, denying market expectations. Nonetheless, post-NFP data showed the market continues to bet as much as 100 bps cuts by the end of this year, with 50 bps slated for the December 2024 meeting.

Europe: Not much was driving the GBP and EUR, but data-wise, the final July Composite PMI for the Eurozone was revised lower, while on the other hand, the Composite PMI for the UK was revised higher, suggesting the divergence of economic conditions between the two. On the political front, French President Emmanuel Macron appointed Michel Barnier as the new French Prime Minister after 50 days of Gabriel Attal (the previous PM) leading the caretaker government following July's snap election. The market is anticipating the ECB further to cut its interest rates for the second time (98.7% probability) when officials meet up this Thursday amidst weak economic activity. There will also be some UK data for investors to scour through for the BoE decision outlook.

Asia: Yuan's fixing last Friday was set at 7.0925 by the PBoC, the strongest fixing in eight months, suggesting the central bank is comfortable letting the currency appreciate amidst current weaknesses in the dollar. However, the sentiment surrounding China's growth remains subdued after today (9 September). The inflation number still shows weak domestic demand as the CPI grew less than expected in August 2024. The JPY strengthened sharply during the week against the weaker dollar in Japan. The Japanese yen was also propelled upward by persistent expectations of an imminent rate hike by the BoJ after BoJ Governor Kazuo Ueda signals that the central bank will continue raising interest rates if the economy and prices align with the central bank's forecasts.

Malaysia: The Ringgit retraced some of the prior week's gains and turned to losses last week but remained in the 4.3105 - 4.3818 range. Last week's BNM decision to maintain the OPR was widely expected. We noted that the overall tone of the statement appears more optimistic than its previous iteration, showcasing Malaysia's robust domestic growth and ringgit recovery. At the same time, we posit that the OPR will stay at 3.00% in 2H2024, which is appropriate and sufficiently supportive of the domestic economy. We also revised our inflation forecast lower from 3.0% to 2.1%, aligning with MPC's latest thinking that inflation is unlikely to exceed 3.0%.

Source: AmInvest Research - 10 Sep 2024