Below expectations – Malaysia’s headline inflation softened in July’19, growing +1.4% y-o-y as compared to +1.5% y-o-y in June’19, which is slightly below in-house and market expectation. On monthly basis, CPI was little changed to +0.1% m-o-m. July’19 headline inflation was underpinned by growths in Furnishing, household equipment & routine household maintenance, Food & non-alcoholic beverages as well as Alcoholic beverages & tobacco. Meanwhile, for core inflation (which excludes administered and high price fluctuation), grew slightly to +2.0% y-o-y from +1.9% y-o-y in the prior month.

Cost of transport maintained deflated – Cost of transport remained deflated, but narrowed to -1.9% y-o-y in July’19 (vs June’19: -2.1% y-o-y). Overall, average monthly fuel price in July’19 for RON 95 was RM1.66 (vs June’19: RM1.66; July’18: RM2.20), RON 97 was RM2.07 (vs June’19: RM1.98; July’18: RM2.57), and Diesel was RM1.74 (vs June’19: RM1.74; July’18: RM2.18). Going forward, we believe cost of transport could increase arising from the introduction of targeted fuel subsidies as Government’s decision to remove the price cap of RON95, probably during second half of 2019.

Higher food inflation, alcoholic and tobacco products – Food inflation showed an uptrend growth for few consecutive months, growing +2.4% y-o-y from +2.3% y-o-y in June’19. Higher food inflation was due to higher sub-group indexes such as Milk & Eggs: +2.6% y-o-y (vs June’19: +2.5% y-o-y), Fruits: +2.5% y-o-y (vs June’19: +1.1% y-o-y), Vegetables: +4.7% y-o-y (vs June’19: +5.2% y-o-y) and Food away from home: +4.4% y-o-y (vs June’19: +4.2% y-o-y). We expect food inflation will continue to show uptrend trajectory in the coming months as most of the food items are imports items amid lower base in 2018. Besides, Alcoholic, beverages & tobacco were inched up +2.3% y-o-y in July’19 from +2.1% y-o-y in the previous month.

Moderate inflation for other key CPI components except Furnishing & household equipment – Furnishing, household equipment & routine household maintenance increased to +3.3% y-o-y as compared to +3.1% y-o-y in June’19. However, other key CPI components moderated, such as Housing, water, electricity, gas & other fuel (+1.9% y-o-y vs June’19: +2.3% y-o-y), Health (+1.3% y-o-y vs June’19: +1.2% y-o-y), Communication (+2.1% y-o-y vs June’19: +2.1% y-o-y), Recreation services & culture (+2.4% y-o-y vs June’19: +2.7% y-o-y), Education (+1.4% y-o-y vs June’19: +1.4% y-o-y) and Restaurants & hotels (+2.4% y-o-y vs June’19: +2.7% y-o-y). Other than that, Clothing & footwear remained deflated for three consecutive months, further sliding to -0.4% y-o-y from -0.1% y-o-y from the last month.

Four states surpassed national CPI – National CPI in July’19 was higher, +1.4% from +1.2% in the last month. Among the states that surpassed the national CPI were Wilayah Persekutuan Kuala Lumpur (+2.2%), Penang (+2.1%) and Selangor & Wilayah Persekutuan Putrajaya (+1.7%) and Johor (+1.5%). Overall, we reckon that inflation rates across states are still manageable amid current resilient economic condition.

Another growth expected in Aug’19 inflation – We opine that inflation in Aug’19 to trend slightly higher due to lower base during GST period (June’18 to Aug’18) before normalizing back in Sept’18. However, we believe that contribution from Transport index will remain lower following capping of retail fuel prices of RON95 and Diesel. We cut our headline inflation for 2019 to +0.8% y-o-y (from +1.3% y-o-y) following lower inflation rate during 7M19. Overall, we opine that 2019 inflation will increase modestly, underpinned by mild inflationary pressure from floating domestic fuel price starting 2H19 (only limit to selected group of people, i.e. low-and-middle income group) and impact of low base effect arising from the tax holiday period in June’18 to Aug’18. Besides, slower global economic growth coupled with flattish crude oil prices would dampen our inflation growth. Despite aggressive interest rates cuts by US Federal Reserve (Fed) and other Asian central banks (i.e. Thailand and India), we opine that Bank Negara Malaysia (BNM) is likely to keep its OPR unchanged at 3.0% for the remaining year of 2019 (following rate cut in May’19 of 25 bps) amid lingering tensions between the US and China on trade issues as we believe BNM’s monetary policy stance is still accommodative to current economical atmosphere.

Source: JF Apex Securities Research - 15 Aug 2019