Global: Mixed performance was seen across global PMI readings in August. Global manufacturing PMI inched up to 52.6 (Jul: 52.4) while global services PMI moderated to 55.5 (Jul: 56.0). Individually, PMI readings showed divergence in (i) strength of recovery among advanced economies; and (ii) softer growth momentum in Asia.

These developments denoted downside risk to the expected synchronized growth among advanced economies. The IMF had in July lowered its global growth forecast to 3.4% from 3.6% predicted in April. In our view, downside risks could emanate from (i) the European economy weakening further despite bond purchase programme; and (ii) China’s economy losing traction on tight monetary policy and reforms.

US: Both the manufacturing and services PMIs hit record high of 59.0 and 59.6 respectively in August (Jul: 57.1 and 58.7 respectively). The strong PMI readings suggest that the US economy continues on the mend despite weaker data on job creation and retail sales. We expect the Fed to turn more aggressive in its language while Fed Fund Rate may be hiked earlier than market expectation in 1Q15.

Euro area: Dimmer manufacturing and services sector outlook, evidenced by the weakening of both PMIs in August. Manufacturing PMI fell to 50.7 (Jul: 51.8) while services PMI dipped to 53.1 (Jul: 54.2), justifying the ECB’s decision to cut its benchmark interest rate by 10bps to 0.05% and pre-announce asset purchase programme on 4 Sep. The move aims to prevent the block from falling into recession and deflation territory by boosting its balance sheet to the level at the start of 2012.

Japan: Manufacturing PMI rose to 52.2 in August (Jul: 50.5) while the services PMI contracted to 49.9 (Jul: 50.4), indicating that Japan’s economic outlook remains mixed following the hike in consumption tax in April.

China: Signs of slower growth momentum emerges as the factory PMI retreated to 51.1 in August (Jul: 51.7), the first moderation after five consecutive months of improvement . Services PMI, however, inched higher to 54.4 (Jul: 54.2). We still expect the Chinese economy to stabilise at around 7.5% growth this year (2013: +7.7%), following the recent mini-scaled and targeted stimulus measures.

Implications on Malaysia: The weaker manufacturing PMI for China and the Euro area may have negative influence on Malaysia’s exports in August given the higher trade linkages with these regions. We maintain our growth forecast of 6.0% for this year, with projected 2H GDP growth slowing to 5.6% from 6.3% in 1H, largely due to higher base a year ago and diminishing net export boost.

With the series of weaker-than-expected data (i.e. July trade & loan data, China & Euro area PMIs), we expect BNM to take a more cautious stance between growth and inflation. The upcoming July IPI data will further ascertain the degree of GDP growth tapering into 2H, an influential factor for OPR decision on 18 Sep.

Source: Hong Leong Investment Bank Research -8 Sep 2014