Malaysia

Reiterate our optimistic view on exports

Total trade surplus in March widened to a whopping RM14.7bil supported by exports which rebounded by 2.2% y/y, benefitting from higher shipments of manufactured goods, while imports fell -9.6% y/y dragged by all the import components.

Meanwhile, we maintain our 2018 exports projection at 9.0% y/y supported by: (1) healthy global growth at 3.6% and global trade; (2) firm commodity prices; and (3) the favourable 12-month forward-looking business sentiments. However, the upside to exports growth will be limited by the high base. Potential headwinds for our trade will most likely come from the trade war.

• Total trade surplus widened to a whopping RM14.7bil versus RM9.0bil in February, bringing the 1Q2018 surplus to RM33.4bil. The strong gain in trade surplus came higher shipments of manufactured goods while imports across the board registered declines.

• Exports rebounded in March, growing 2.2% y/y from -2.0% y/y in February due to poor shipments owing to the Lunar New Year break. The electrical and electronics sector rose 8.7% y/y and crude petroleum (+18.4% y/y) while drag came from chemical and chemical products (-6.6% y/y), petroleum products (-8.6% y/y), palm oil-based products (-6.6% y/y), LNG (-13.3% y/y) and rubber products (-37.8% y/y).

• Imports fell for the second month by -9.6% y/y from -2.8% y/y in February – the weakest growth since September 2009 when it shrank by -19.9% y/y. The drag came from intermediate goods which account for 52.8% of total imports, down -14.4% y/y from -14.7% y/y in February, capital imports fell -30.5% y/y from 6.0% in February and consumption imports lower by -12.4 y/y from 12.6% y/y in February.

• Poor intermediate and capital imports imply modest spending on capital by manufacturers. The Manufacturing Purchasing Managers’ Index (PMI) fell for the third month in April due to an increasing poor output and new export orders attributed to the softer demand from domestic and export markets. It fell to 48.6 in April from 49.5 in March.

• Meanwhile, we maintain our 2018 exports projection at 9.0% y/y supported by: (1) healthy global growth at 3.6% and global trade; (2) firm commodity prices; and (3) the favourable 12-month forward-looking business sentiments. However, the upside to exports growth will be limited by the high base. Potential headwinds for our trade will most likely come from the trade war.

US

Is Fed still on track for aggressive rate hikes?

The unemployment rate fell to 3.9% despite the non-farm payrolls rising by just 164K and the lower labour force participation rate which eased slightly to 62.8% in April. Average hourly earnings number rose 0.1% m/m in April and 2.6% y/y, suggesting a lack of acceleration mainly due to weak gains in productivity.

In our view, the lack of wage pressure will likely be one of the key takeaways for the Fed in deciding the pace of the rate hikes going forward though the Fed is on track to continue raising rates. Another important indicator is the participation rate that has dipped. We need some time to see how the tax cut plays out as capital deepening will result in some productivity growth and bump up wages.

• The unemployment rate fell to 3.9% in April, beating ours and consensus estimation of 4.0% – around 18-year low despite the non-farm payrolls rising by just 164K, falling below our estimation of 190K and consensus at 192K. The drop in the unemployment rate came although labour force participation rate was lower at 62.8% in April versus 62.9% in March, the lowest since January.

• Average hourly earnings number rose 0.1% m/m in April after a 0.2% gain in March. That left the annual increase in average hourly earnings at 2.6% y/y in April from 2.6% y/y in March. We feel the lack of acceleration in wages is mainly due to weak gains in productivity.

• In our view, the lack of wage pressure will likely be one of the key takeaways for the Fed in deciding the pace of the rate hikes going forward. While the Fed is on track to continue raising rates, the lack of inflation could augur for a more subdued pace than some in the market have anticipated.

• Another important indicator is the participation rate that has dipped. We need some time to see how the tax cut plays out. There is a possibility that the tax cuts may result in a capital deepening, and over time will bring about some productivity growth and bump up wages.

Source: AmInvest Research - 7 May 2018