Malaysia

Second month manufacturing PMI in contraction

Headline manufacturing PMI remained in the contraction region for the second consecutive month, with February’s reading at 49.9, dragged by lower orders and production apart from margin squeeze due to higher input prices and limited transfer pricing. Poor showing was also seen in South Korea, Thailand and Vietnam while Indonesia, Japan, Taiwan and China presented softer expansion. Although the manufacturing PMI data indicates some sign of softening in this sector, we project the sector should grow around 5.7% in 2018 supported by E&E, chemical products and resource-based activities apart from construction-related businesses. We project the GDP should grow around 5.5% for the full year of 2018.

• Headline manufacturing PMI remained in the contraction region for the second consecutive month. February’s PMI of 49.5 was weaker than January’s 49.9. The demarcation between expansion and contraction is 50. Poor manufacturing production was the cause for the contracting PMI. The drag was due to weak orders added with lack of new businesses. Besides, new export orders were also weak.
• We found the manufacturing PMI in some of the Asian countries like South Korea (49.1), Thailand (49.1) and Vietnam (49.1) also fell into the contraction region in the month of March. Meanwhile, for countries like Indonesia (50.7), Japan (53.5), Taiwan (55.3) and China (51.0), though in the expansion region. the sector grew at a slower pace.
• Based on the manufacturing PMI data, it seems to indicate some sign of softening in this sector. This could partly be due to firms suffering from margin pressures in view of high input prices apart from weak orders which limit transfer pricing.

• However, we project the manufacturing sector on the whole should grow around 5.7% in 2018 supported by E&E, chemical products and resource-based activities apart from construction-related businesses. We project the GDP should grow around 5.5% for the full year of 2018.

Indonesia

Inflation expected to be within BI’s target

March headline inflation rose slightly to 3.4% y/y while core inflation inched up to 2.7% y/y. With inflation expected to stay within the central bank’s target of 2.5% – 4.5% in 2018, we expect the central bank to focus on ensuring sustainable growth and currency risk given that the cheap monetary policy has been sufficient to boost momentum in the domestic economy’s recovery.

• March headline inflation rose slightly by 3.4% y/y from 3.2% y/y in February while core inflation inched up higher to 2.7% y/y from 2.6% y/y in February. The figure fell within the central bank’s target of 2.5% – 4.5%.

• Much of the inflation in March came from food prices (4.2% y/y), clothing (4.1% y/y) and housing (3.5% y/y). Meanwhile, the moderate gain from government administered prices and energy (5.1% y/y and 7.1% y/y respectively) suggests the impact of cuts in government subsidies for items like electricity and fuel on inflation has been contained thus far.

• Bank Indonesia (BI) left the seven-day reverse repurchase rate at 4.25%. Inflation is expected to be within the central bank’s target range of 2.5% to 4.5%. Hence, we expect BI to focus on ensuring sustainable growth and currency risk given that the cheap monetary policy has been sufficient to boost momentum in the domestic economy’s recovery.

Thailand

Central bank to maintain policy rate

Headline inflation remained below the central bank’s target for the 13th consecutive month with March reading at 0.79% y/y while core inflation remained unchanged at 0.63%y/y. The Bank of Thailand’s (BoT) target is 1% – 4% while our projection is 1.2% – 1.4% for 2018. With inflation expected to remain subdued on the back of a stronger baht, uneven wage growth and poor producer price that limits transfer pricing, we believe the central bank will most likely keep the policy rate unchanged at 1.50% in 2018. Our probability for a rate hike is around 25%. This is on the condition that demandpull inflation kicks in with wages growing across the broad. ? Headline inflation rose to 0.79% y/y in March from 0.42% y/y in February, marking the 13th consecutive month inflation remained below the Bank of Thailand’s (BoT) target of 1% – 4% and our projection of 1.2% – 1.4%. Meanwhile, core inflation stayed unchanged at 0.63% y/y in March.

• The pickup in price pressure was driven by both non-food and food prices, up 1.13% y/y and 0.19% y/y in March from 0.74% y/y and -0.16% y/y respectively in February.

• Despite the economic activities continuing to improve, overall inflation is still subdued, suggesting there is still some slack in the economy. We believe this could be due an uneven general rise in labour income which is reflected across all sectors. Besides, the stronger baht, which climbed 3.9% YTD, continued to drag inflation.

• With inflation expected to remain subdued on the back of a stronger baht and poor Producer Price Index (PPI) that limits transfer pricing, we believe the central bank will most likely keep the policy rate unchanged at 1.50% in 2018. Our probability for a rate hike is around 25%. This is on the condition that demand-pull inflation kicks in with wages growing across the broad.

Source: AmInvest Research - 3 Apr 2018