Cost of doing business fairly contained

The Producer Price Index (PPI) continued to grow at single digit for the sixth straight month. In August, the PPI rose 6.7% y/y bringing the first eight months’ average to 8.2% y/y. The slower gain in the PPI was due to a moderate increase in the prices of intermediate (+7.7% y/y) and finished materials (+1.1% y/y), partly due to the firmer Malaysian ringgit (MYR) against the USD, with stable electricity and gas supply cost (+1.7% y/y) and a jump in water supply cost (+0.8% y/y).

We feel that the overall cost of doing business should be fairly contained supported by the firmer USD/MYR and stable commodity prices. But the low base comparison could throw off the PPI reading to some extent. We reiterate our 3.5% – 3.7% CPI projection for 2017 with our base case of no change to the 3.00% OPR in 2017 while holding our 45% chance for the OPR to be raised.

Meanwhile, we found the PPI figure did not affect the USD/MYR movement. However, we expect the USD/MYR to have some impact from the announcement of the August trade figures and September Nikkei Manufacturing PMI this week. We expect the USD/MYR to be on a tight trading range during the week, likely hovering around 4.2150 – 4.2300.

• The Producer Price Index (PPI) continued to grow at single digit for the sixth straight month. In August, the PPI rose 6.7% y/y from 7.1% y/y in July, bringing the first eight months’ average to 8.2% y/y.

• The slower gain in the PPI was due to a moderate increase in the prices of intermediate which rose 7.7% y/y in August from 8.6% y/y in July as well as finished materials, which were up 1.1% y/y in August from 1.3% y/y in July. This could partly be due to the firmer Malaysian ringgit (MYR) against the USD. However, we noticed the electricity and gas supply cost rose at the same pace as in July by 1.7% y/y while the cost of water supply doubled to 0.8% y/y in August from 0.4% y/y in July.

• On the whole, we feel that the overall cost of doing business should be fairly contained. With the MYR presenting a firmer outlook against the USD, added with stable commodity prices, we expect the PPI to continue rising at a moderate pace. However, the low base comparison could throw off the PPI reading to some extent.

• We reiterate our 3.5% – 3.7% CPI projection for 2017 with our base case of no change to the 3.00% OPR in 2017. At the same time, our view of a 45% chance for the OPR to be raised by 25bps in 4Q2017 remains.

• Meanwhile, we found the PPI figure did not affect the USD/MYR movement. However, we expect the USD/MYR to have some impact from the announcement of the August trade figures and September Nikkei Manufacturing PMI this week. We expect the USD/MYR to be on a tight trading range during the week, hovering around 4.2150 – 4.2300.

Source: AmInvest Research - 2 Oct 2017