Below forecasts – Headline inflation turned to deflation in Mar’20, contracting -0.2% y-o-y as compared to +1.0% y-o-y during Feb’20. The result is slightly below our in-house and market expectations. Deflationary pressure recorded during this period was due to massive contraction in Transport inflation which offset higher costs in Food & non-alcoholic as well as Alcoholic & tobacco beverages. As for core inflation (which excludes administered and high price fluctuation items), it posted same core inflation as prior month which was +1.3% y-o-y (vs Feb’20:+1.3% y-o-y). As for the first quarter of 2020, headline inflation grew +0.9% y-o-y as compared to -0.3% y-o-y during first quarter of 2019.

Massive drop in cost of Transport – Cost of transport in Mar’20 contracted again after posting positive growths for two consecutive months. Transport cost tumbled -8.9% y-o-y, highest deflationary pressure since Aug’16 in view of lower global crude oil prices which led to lower domestic fuel prices. Overall, average monthly fuel prices for Mar’20 for RON 95 was RM1.63 (vs Mar’19: RM1.73), RON 97 was RM1.93 (vs Mar’19: RM2.11) and Diesel was RM1.82 (vs Mar’19: RM1.82). We deem transport inflation to moderate further as WTI and Brent Crude Oil Future plunged significantly due to the global lockdown pursuant to pandemic and oversupply condition which led to out of storage capacity.

Higher Food, Alcoholic & tobacco inflations – Despite contraction in Transport and moderate inflations for other sub-components, i.e. Food inflation rose +1.2% y-o-y in Mar’20 from +0.8% y-o-y in Feb’20 buoyed by sub-food items such as Vegetables (+5.7% y-o-y vs Feb’20: +6.3% y-o-y), Meat (+0.9% y-o-y vs Feb’20: -2.8% y-o-y), Fish & seafood (+0.3% y-o-y vs Feb’20: -0.1% y-o-y), Oils & fats (+1.4% y-o-y vs Feb’20: +0.3% y-o-y) and Fruits (+0.6% y-o-y vs Feb’20: +0.1% y-o-y). Moreover, Alcoholic & tobacco was also little changed, +0.3% y-o-y in Mar’20 from +0.2% y-o-y in Feb’20. Both Food inflation as well as Alcoholic & tobacco inflation were higher arising from higher consumption by consumer during movement control order (MCO) imposed by government since mid-March due to Covid-19 outbreak.

Moderate costs for other sub-components – Costs for Clothing & footwear (-1.3% y-o-y vs Feb’20: - 1.1% y-o-y), Furnishing, household equipment & routine household maintenance (+0.8% y-o-y vs Feb’20: +1.0% y-o-y) and Restaurants & hotels (+0.9% y-o-y vs Feb’20: +1.1% y-o-y) were slightly lower. Meanwhile, Housing, water, electricity, gas & other fuel (+1.6% y-o-y), Communication (+1.5% y-o-y), Recreation services & culture (+0.7% y-o-y) and Education (+1.3% y-o-y) exhibited an unchanged growths as the prior month. Nevertheless, cost of Health and Miscellaneous goods & services posted higher by +1.4% y-o-y and +2.6% y-o-y respectively in Mar’20 from +1.3% y-o-y and +2.5% y-o-y respectively in Feb’20.

Four states surpassed national figure; higher food costs across all states – Four states surpassed the national CPI for the month of Mar’20 which were Selangor & Wilayah Persekutuan Putrajaya (+0.3%), Wilayah Persekutuan Kuala Lumpur (+0.2%), Penang (+0.1%) and Pahang (-0.1%). Meanwhile, all states recorded higher food inflations due to higher food consumption by consumers during movement control order (MCO).

Expect inflation for Apr’20 to drop further– We believe deflationary pressure to continue in April in view of lower transportation cost following massive drops in global crude oil prices which lead to lower domestic retail fuel prices. Amid pandemic outbreak and extension of Malaysia’s MCO, we cut our overall CPI forecast for 2020 to +0.2% from +0.8% y-o-y previously in view of slower inflation mainly from Transport component. We expect another OPR cut in May’20 by 25-50bps in view of greater global economic downside risks and weakening domestic demand growth under prevailing Covid-19 virus pandemic.

Source: JF Apex Securities Research - 23 Apr 2020