• Muted economic news next week

• Investors will be focusing on domestic development

• Kelantan to become the first state to dissolve its state assembly, scheduled on June 22, paving the way for the state election.

Sentiment was generally upbeat last week up until the release of US May inflation numbers only to be shot down during the release of US June policy decision. To recap, markets were elated when US May inflation came down further, slightly better than consensus expectation, after it reached 4.0% against 4.9% in April and market expectation of 4.1%. Core CPI remained sticky however after dropping just a tad to 5.3% in May versus 5.5% in April, suggesting that US FOMC will remain on guard and cautious in view of this. The cautious US FOMC stance is also supported by the still sizzling US labour market condition given job openings that was in excess of 10mn in April and unemployment rate that remained steady in May (3.7%). Still, we foresee little to cheer on the pullback in US inflation as the decline was driven main by the drop in gasoline prices. US inflation could still rebound in the near term no thanks to the upside risks in oil price, consistent with OPEC+ will up its supply cut by another 2mn barrel per day to 3.66mn in May. This is excluding the selfimposed cut by Saudi Arabia that could reach 1mn barrel per day. Nonetheless, this will be offset by the impending drop in USD courtesy of an expected slowdown in US interest rate pace in 2H (note: USD to weaken). On that score, US FOMC decided to keep its policy rate steady in its recent policy meeting, its first time in 11 meetings, a decision that was largely expected. The policy statement was somewhat disturbing given the central bank clear ‘hawkish stance’ which signals an upside risks to the FFR in the near term. In a nutshell, the US FOMC is not done yet tightening the FFR and hence, some legs to reach its terminal rate of 5.50%-5.75%, another 50 basis points to go (current FFR @ 5.25%). This in our view will be used only as a spare if inflation remain stubborn and slower-than-expected to reach its target of 2.0%++. This is a clever strategy as its ‘forward guidance’ of hawkish stance will have a large bearing on ‘expected inflation’ and therefore, inflation itself. This could dampen aggregate demand with a knock on effect on inflation. In any case, we think the US can manage a mild recession given the pressing need to tame inflation (US 2024 GDP: 0.7%; 2023E: 1.2%). US economy is expected to bounce back in 2024 (GDP: 2.0%).

There is little economic announcement this week. Investors will therefore look for domestic development for trading clue. All eyes will be on a series of state assembly dissolutions with Kelantan to become the first to dissolve (22nd June). Political uncertainty will remain a market dampener and we expect FBMKLCI to trade sideways with downside risks until all is clear and over with.

Source: BIMB Securities Research - 19 Jun 2023