Substantially below expectations – April’s headline CPI widened its deflationary pressures to -2.9% yo-y, substantially below our in-house and market projection of -1.3% y-o-y and -1.6% y-o-y respectively. Massive decline recorded was due to heavy contraction in Transport index as well as other indexes such as Clothing & footwear, Housing, water, electricity, gas & other fuel and Furnishing, household equipment & routine household maintenance. As for core inflation (which excludes administered and high price fluctuation items), it posted same core inflation as previous month which was +1.3% y-o-y (vs Mar’20:+1.3% y-o-y).

Sharp decline in cost of Transport – Cost of transport contracted -21.5% y-o-y during Apr’20 compared to -8.9% y-o-y during Mar’20, extending its highest deflationary pressures since Aug’16 following lower global crude oil prices which led to lower domestic fuel prices. Overall, average monthly fuel prices for Apr’20 for RON 95 was RM1.26 (vs Apr’19: RM1.66), RON 97 was RM1.56 (vs Apr’19: RM2.18) and Diesel was RM1.47 (vs Apr’19: RM1.74). For the following month, we reckon that cost of transport to narrow its deflationary pressures as WTI and Brent Crude Oil Future recovered and thus slightly lifted our domestic fuel prices.

Mild growths in Food, Alcoholic & tobacco… – During this period, food inflation as well as alcoholic & tobacco inflation registered mild growth of +1.2% y-o-y and +0.2% y-o-y respectively (vs Mar’20: +1.2% y-o-y and +0.3% y-o-y respectively). Food inflation was underpinned by growth in Food at home (+1.2% y-o-y vs Mar’20:+0.9% y-o-y) such as Rice, bread & other cereals (+0.8% y-o-y vs Mar’20:+0.6% y-o-y), Meat (+2.6% y-o-y vs Mar’20:+0.9% y-o-y), Fish & seafood (+0.5% y-o-y vs Mar’20:+0.3% y-o-y). Meanwhile, Food away from home (take-away food) grew at +1.5% y-o-y as compared to +1.6% y-o-y).

…as well as other sub-components – Costs for Clothing & footwear (-4.2% y-o-y vs Mar’20: -1.3% yo-y), Housing, water, electricity, gas & other fuel (-3.8% y-o-y vs Mar’20: +1.6% y-o-y) and Furnishing, household equipment & routine household maintenance (-0.4% y-o-y vs Mar’20: +0.8% y-o-y) were lower following closure of tenants arising from the mandatory closed ordered (MCO). On the same note, nonessential sectors also recorded moderate growths such as Recreation services & culture (+0.6% y-o-y vs Mar’20: +0.7% y-o-y), Health (+1.2% y-o-y vs +1.3% y-o-y) and Education (+1.2% y-o-y vs +1.3% y-oy). However, Communication (+1.6% y-o-y vs Mar’20: +1.5% y-o-y) and Miscellaneous goods & services (+2.3% y-o-y vs Mar’20: +2.6% y-o-y) posted higher growths.

Three states remarked higher growths than national CPI; five states exceeded national food costs – Three states registered higher growths than national CPI for the month of April’20, which were Selangor & Wilayah Persekutuan Putrajaya (-2.3%), Wilayah Persekutuan Kuala Lumpur (-2.0%), Penang (- 2.4%). Meanwhile, five states recorded higher food inflations due to higher food consumption by consumers during the movement control order (MCO) namely Selangor & Wilayah Persekutuan Putrajaya (+1.8%), Penang (+1.5%), Perak (+1.8%), Johor (+1.7%) and Terengganu (+1.8%)

Expect deflation for May’20 to taper off following conditional movement control order (CMCO) – We expect deflationary pressure to narrow in May’20 as almost all economic and social activities to be resumed following CMCO. Amid pandemic outbreak and extension of Malaysia’s MCO, we cut our overall CPI forecast for 2020 to -0.5% from +0.2% y-o-y previously in view of slower inflation mainly from Transport component and other components. On the recent Monetary Policy Committee (MPC) announcement, Bank Negara Malaysia (BNM) cut its Overnight Policy Rate (OPR) by 50 basis points (bps) to 2.00% from 2.50% previously to cushion the impact of Covid-19. We reckon another one OPR cut for the rest of 2020 in view of greater global economic downside risks and weakening domestic demand growth under prevailing Covid-19 virus pandemic.

Source: JF Apex Securities Research - 21 May 2020