Snapshot Summary…

Global Rates: Treasuries rally on pricing of a 50 cut

MYR Bonds: Bonds firmed up to follow global markets and MYR rally

Global FX: The dollar fell towards the end of last week as the weight of the rate cut remains unclear

USD/MYR: Ringgit took advantage of weakening dollar ahead of FOMC

Fixed Income

Global Bonds: US Treasuries rallied last week on talk of a possible 50 bps Fed rate cut. We think traders took heed of FT and WSJ articles suggesting a strong case for a 50 cut. On top of suggesting inflation is fast cooling, WSJ argued that high real rates in the US suggest restrictive financing costs currently. CME Group pricing indicated probability of 50 cut at 51% last Friday, up from 28% Thursday. The bond market was more in range midweek as traders focused on the core CPI at +0.3% m/m in August vs +0.2% in July. Meanwhile, Bunds pared w/w gains. The ECB cut rates for a second time, but officials signalled there is room for flexibility in incoming decisions as growth risks remain, but inflation is now near the 2% level.

Malaysia Government Bonds: Bonds firmed up to follow global markets still debating whether the Fed could execute a larger-than-expected rate cut. Ringgit government bonds also benefitted from the MYR rally as it breached 4.300. Meanwhile, focus was on the GII 08/43 auction. However, there was relatively weak demand at 1.921x BTC and 4.084% average yield for the MYR3.0 billion tender (plus MYR2.0 billion private placement).

Malaysia Government Bonds View: MGS trading could turn cautious as FOMC meets this week. Nonetheless, domestic factors remain favourable for bonds, as growth prospects are upbeat whilst inflation remains benign till there are more concrete talk of fuel subsidy rationalization and GST. Reopening of 7Y MGS 04/31 announcement is expected at issuance size of MYR4.5 billion.

Malaysia Corporate Bonds: Ringgit corporate bonds were traded mixed. There was demand for higher grade GGs but overall AAA and AA papers were mixed as investors balanced bargain hunting with profit taking activity.

Malaysia Corporate Bonds View: Looking at AA3 power bonds, there seems very little opportunity after recent realignment trades. However, slightly extending duration on the Edra Energy curve (>6Y) could yield a small return on a per risk (RRR) basis, or shift into select Southern Power or Jimah East on shorter tenors (<5Y) for minor yield pickup (Exhibits 3-4).

Forex

DXY Index: While the market generally agrees the Fed will start the rate cut cycle during this week’s meeting but the quantum of the cut was up for debate. Note that data released last week pointed towards the US economy is on firmer ground than what the market had been pricing. Consumer inflation slowed further towards Fed’s target, producer inflation grew slightly faster and consumer sentiment improved further; which if taken together, point towards smaller rate cuts. In the futures market, according to the CME FedWatch tool, last week the market was pricing in as much as 70% probability for a 25 bps rate cut and 30% for 50 bps. But on Monday, the situation turned around as bets for 50 bps cut propped up to 62% and 25 bps cut at 38%. In turn, the DXY index posted multiple days of slide in tandem with the fall in UST yields. Helping the reversal was news flows suggesting Fed officials were wrestling with the question of how aggressively they should lower borrowing costs and a call by former New York Fed President Dudley that there is a strong case for a 50 bps rate cut. Despite that, we stick with our in-house call that a 25 bps is the likelier outcome as we think the Fed should be careful against the risk of inflation to flare up again. This week, should the Fed indeed embark its rate cut cycle with 25 bps, the DXY index may break out of its consolidation range and go lower to test the next support level of 99.5.

Europe: As global markets are watchful of the Fed, any development during the meeting could influence the EUR. Last week, the “hawkish cut” decision by the ECB alongside the lack of guidance for further cuts (markets were looking for further hints of easing) supported the EUR, alongside the broad dollar weaknesses. But latest data on Eurozone wages and labour cost suggests the pressure has further waned, which may warrant the ECB to lower borrowing costs again. On the other hand, mixed ECB officials’ stance did not help clear the cloudy outlook. Policymakers like ECB Vice President Luis de Guindos are open to an October rate cut but another member Peter Kazimir argued that quick cuts are risky and need more data to allow for that. Aside from the Fed, the BoE is also scheduled to decide on its policy rate. Consensus is expecting the BoE to maintain its rate at current level of 5.00%, which is totally not unjustifiable as last week’s wage growth data is only showing gradual easing and can pose risks for inflation to be stickier.

Asia: The Japanese yen marked its fifth straight session of a bullish streak, reaching its strongest level since July last year amidst expectations that the BoJ would raise interest rates further whilst the Fed will cut rates. Despite slowing economic growth, hints by BoJ officials Junko Nakagawa show that the central bank will raise rates if the economy and inflation move in line with the bank's forecasts, and Naoki Tamura said the interest rate has to be at 1.0% by late next year - more than enough to drive the JPY stronger. In China, we noted that the local economy remained sluggish as over the weekend’s data came in disappointingly below market expectations. The sentiment surrounding the yuan now revolves around its own fragile fundamentals amidst the Fed rate cuts. Meanwhile, the AUD posted decent gains of 0.5% w/w. Last Thursday, RBA’s Assistant Governor Sarah Hunter remarked that “limited” easing this year in some key employment indicators is a major reason why the central bank remained persistently hawkish in its stance.

Malaysia: In tandem with strength seen in Asian currencies, the ringgit strengthened 0.7% last week amidst the broad dollar downside and expectations the Fed’s rate cut cycle will begin this month. Even looking at economic data, Malaysia’s growth prospects remained intact after last week’s industrial production growth beat market expectations while wholesale and retail trade volume continued to grow healthily. This week, as the markets are watchful for central banks meetings, we may see the ringgit to trade sideways and may gain further once the Fed actually delivers its cut. This morning (Tuesday 17th September) we saw the USDMYR pair has breached the 4.30-level and could maintain below that level if pressure to go lower remains. However, there are risks of corrections if the market does not get what it wants from the Fed meeting i.e., larger cuts and/or lack of future guidance.