• Global: Global PMI numbers continued to remain lacklustre in August, affected by fears of potential China slowdown, looming Fed rate hike and further retracement in commodity prices. Global factory PMI dipped to a 25-month low of 50.7 (July: 51.0), despite a pick-up in services PMI (54.4; July: 54.1). Hence, we concur with the IMF’s view that there is now rising downside risk to world growth outlook (HLIB: +3.4% in 2015f). We also anticipate more monetary easing and fiscal policy adjustments in key economies.

• US: After the ripple effects of yuan devaluation and a potential China slowdown, the surprised moderation in ISM data reduced the odds of Fed rate hike in Sep. ISM factory index dived to a 27-month low of 51.1 in Aug (July: 52.7) while services index also weakened to 59.0 (July: 60.3). Nevertheless, most policymakers in the recent Jackson Hole symposium said that recent financial market volatility had not dented their view of improving job market and economy. Inflation is still expected to move higher in the medium term. We fine-tune our call of rate liftoff to October, with a 25bps hike and no balance sheet wind down.

• Euro Zone: Recent indicators including PMIs signalled that economic recovery remains on track even though somewhat weaker (2015f: +0.8%), partly thanks to tentatively resolved Greek debt saga and ongoing QE programme. Manufacturing PMI stayed above 52.0 pts for six months (52.3; July: 52.4) while services index hovered around 54.0 pts for seven months (54.4; July: 54.0). Still, the ECB might expand its stimulus after revamping QE programme on 3 Sep, if China’s downturn and financial volatilities significantly weigh on growth and inflation over next few months.

• Japan: Notwithstanding higher PMI results in Aug, Japan’s economic growth recovery is still on a shaky note in 2H (2015f: +0.8%) given its high exposure to the Chinese economy. Manufacturing PMI hit 7-month high of 51.7 (July: 51.2) while services index edged up to a 22-month high of 53.7 (July: 51.2). That said, core inflation continued to hold near zero levels. Coupled with dimmer global demand, the BOJ may need to stand ready to ease monetary policy.

• China: The bleak PMI readings pointed to possible sharper slowdown in China (2015f: +6.8%), notwithstanding the support from series of interest rate cuts, RRR reduction and yuan devaluation in Aug. Factory PMI contracted to a 3-year low of 49.7 (July: 50.0) while services PMI cooled to 53.4 (July: 53.9). We will not be surprised should the PBOC loosen its policy again to aid its sputtering economy and tame the capital market turmoil.

• Implications on Malaysia: The combination of rising global growth concerns and ongoing domestic issues painted a gloomier picture for Malaysia’s export sector in 2H. The Nikkei’s PMI slowed down further to 47.2 (July: 47.7), the lowest level since Nov 2012. Hence, we maintain our view of a weaker GDP growth of 4.9% in 2H (1H: +5.3%) with growth to bottom out in 3Q. That said, full year GDP growth of 5.0% remain favourable and inflation risks are limited, providing comfortability for BNM to stand pat further.

Source: Hong Leong Investment Bank Research - 7 Sep 2015