Global: Global PMI readings for July showed a mixed performance, suggesting that soft patch in growth will continue over next few months. Global factory PMI held at a 2-year low of 51.0 in July while services PMI inched up to 53.9 (May: 53.6). Key hurdles are retracement in commodity prices due to potential removal of Iran sanctions, slowdown in the Chinese economy and likelihood of US Fed lift-off in September. Thus, we expect global growth to remain flat at 3.4% this year, with policy rates to stay low across major central banks.

US: Notwithstanding global woes that have put a brake on US manufacturing sentiment, other economic fundamentals (i.e. employment and housing sector) are improving and supportive of higher GDP growth in 2H. ISM manufacturing index fell to 52.7 in July (June: 53.5) while the services index rose to almost a 10-year high of 60.3 (June: 56.0). We maintain our projection of first rate hike of 25bps in Sep/Oct as the US economy has emerged stronger as expected amid stronger US$ that has somewhat curbed exports and oil & gas activities.

Euro Zone: Growth outlook stayed soft (HLIB: +0.8% for 2015) as mirrored by the fall in both manufacturing and services index to 52.4 and 54.0 respectively in July (June: 52.5 and 54.4). Negative forces, emanating from lingering Greek debt issue, Britain’s decision to vote on leaving the EU and wearying global demand, signified that ECB would need to continue its QE programme until end-September 2016 to sustain its marginal growth revival.

Japan: Despite depreciating yen, bumpy PMI readings and inflation data suggest that a return to strong growth in Japan is unlikely this year (HLIB: +0.8%). Factory PMI picked up to 51.2 after dropping to edge of threshold of 50.1 in June; Services PMI dipped to 51.2 (May: 51.8). Core inflation remained near zero levels. The renewed external uncertainties may further weaken the impact of existing stimulus. Hence, we see possibility of further QE expansion in the remainder of the year.

China: The latest set of PMI data painted a gloomier picture of China economy (HLIB: +6.8% for 2015) despite series of loosening measures since late 2014. Manufacturing PMI fell to 50-point mark that separates growth from contraction in July (June: 50.2) while services PMI inched up to a 5-month high of 53.9 (June: 53.8). As such, we do not rule out any targeted monetary and fiscal policy easing over next few months in order to reduce risks from a stock market slump.

Implications on Malaysia: Both external and domestic forward indicators (i.e. PMIs, consumer sentiment and business confidence) continued to point to a modest growth outlook for Malaysia in 2H15 (HLIB: +5.0% in 2015). Weak PMI readings in major trading partners (i.e. China, US and Eurozone) point to subdued export picture ahead. The country’s factory PMI also stayed in contraction territory in July (47.7; June: 47.6). Together with manageable inflation risk and contained financial imbalances risk, we retain our end-2015 OPR target at 3.25%. 

Source: Hong Leong Investment Bank Research - 7 Aug 2015