Marginally below expectations – Headline inflation for the month of May’20 recorded same deflationary pressure as previous month which tumbled -2.9% y-o-y (vs Apr’20: -2.9% y-o-y). The result was worse than our in-house and market forecast of -2.5% y-o-y and -2.8% y-o-y respectively. Massive deflationary pressure during this period was triggered by sharp contraction in cost of Transport as well as other components 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 slightly eased to +1.1% y-o-y as compared to +1.3 y-o-y during prior month. However, on monthly basis, CPI slightly rose to +0.3% m-o-m in May’20 as compared to -2.7% mo-m in Apr’20.

Easing cost of Transport – Cost of transport contracted -20.8% y-o-y during May’20 (vs Apr’20: -21.5% y-o-y) due to lower Fuel & lubricant for personal transport equipment (-37% y-o-y). However, transport’s contraction was narrowed resulted from increase in domestic fuel prices in view of recovery of global crude oil prices. Overall, average monthly fuel prices for Apr’20 for RON 95 was RM1.26 (vs May’19: RM1.66), RON 97 was RM1.62 (vs May’19: RM2.19) and Diesel was RM1.47 (vs Apr’19: RM1.74). We expect cost of transport to narrow further as WTI and Brent Crude Oil Future recovered and thus slightly lifted our domestic fuel prices.

Flattish growths in Food, Alcoholic & tobacco… – During this period, food inflation and alcoholic & tobacco inflation posted the same growth as previous month, growing +1.2% y-o-y and +0.2% y-o-y respectively. Both food and alcoholic & tobacco inflation was spurred by growth in sub-indexes such as Meat (+2.7% y-o-y vs Apr’20:+2.6% y-o-y), Fish & seafood (+0.7% y-o-y vs Apr’20:+0.5% y-o-y) and Fruits (+0.6% y-o-y vs Apr’20:+0.9% y-o-y), as well as Alcoholic beverages (+0.6% y-o-y).

Mixed growth in other sub-components – Costs for Clothing & footwear (-1.1% y-o-y vs Apr’20: - 1.2% y-o-y), Housing, water, electricity, gas & other fuel (-2.6% y-o-y vs Apr’20: -2.2% y-o-y) remained in contraction during this period dented by subdued in Clothing (-0.5% y-o-y), Footwear (-3.3% y-o-y) and Electricity, gas & other fuels (-28.5% y-o-y). Moreover, Furnishing, household equipment & routine household maintenance (-0.2% y-o-y vs Apr’20: +0.8% y-o-y) turned to contraction following contraction in Glassware, tableware, & household utensil (-0.5% y-o-y) as well as Goods, services for routine household maintenance (-0.6% y-o-y). Meanwhile, Health (+1.2% y-o-y) and Communication (+1.6% y-oy) registered same growth as previous month despite slight decrease in Education (+1.0% y-o-y vs +1.2% y-o-y). In addition, Recreation services & culture (+0.7% y-o-y vs +0.6% y-o-y), Restaurant & hotels (+0.9% y-o-y vs +0.7% y-o-y) as well as Miscellaneous goods & services (+2.8% y-o-y vs +2.8% y-o-y) showed higher growths attributed to ease in movement control order (MCO) to non-essential services sectors.

Sarawak, Kelantan as well as Kedah & Perlis posted highest deflationary pressure; higher food inflation within four states – Three states recorded highest deflationary pressure namely Sarawak (- 3.8%), Kelantan (-3.7%) and Kedah & Perlis (-3.7%). However, Wilayah Persekutuan Kuala Lumpur (- 1.9%) registered lowest deflationary among others. Meanwhile, four states five states recorded higher food inflations due to higher food consumption during the MCO namely Selangor & Wilayah Persekutuan Putrajaya (+2. %), Perak (+1.8%) and Johor (+1.3%).

Expect deflation for June’20 to taper off further following recovery movement control order (RMCO) – We expect deflationary pressure to taper off further during June’20 as almost all economic and social activities are expected to be resumed following RMCO. Amid pandemic outbreak and extension of Malaysia’s MCO, we retain our CPI forecast for 2020 of -0.5% in view of slower inflation mainly from Transport component and other components. Moreover, we are of the view that there could be another 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 - 25 Jun 2020