Slightly below expectations – June’20 headline inflation was slightly below estimate, contracting -1.9% y-o-y as compared to our in-house and market forecast of -1.8% y-o-y. However, June’20 headline inflation was substantially better than the prior month which contracted -2.9% y-o-y. The better-than-expected results compared with the previous month was underpinned by improved growth from Food inflation as well as easing deflationary pressure from Transport inflation. Moreover, on a monthly basis, CPI improved to +1.0% m-o-m in June’20 (vs May’20: +0.3% m-o-m). For 1H20, headline inflation contracted -0.8% y-oy as compared t0 +0.2% y-o-y during 1H19. Easing inflation growth was dented by contractions in Clothing & footwear, Housing, water, electricity, gas & other fuel as well as Transport.

Cost of Transport mitigated deflationary pressure – Cost of transport narrowed its deflationary pressure, which contracted -14.3% y-o-y in June’20 as compared to -20.8% y-o-y during May’20 in view of higher domestic fuel prices. Overall, average monthly fuel prices for June’20 for RON 95 was RM1.58 (vs June’19: RM1.66), RON 97 was RM1.88 (vs June’19: RM1.98) and Diesel was RM1.75 (vs June’19: RM1.74). Soothing deflation in transport was due to improve in Transport services which grew +0.2% y-o-y. As for 1H20, cost of transport contracted -9.9% y-o-y as compared to -4.1% y-o-y in 1H19.

Improved Food inflation; Alcoholic & tobacco inflation remained unchanged – Food inflation rose to +1.6% y-o-y (vs May’20:+1.2% y-o-y) following higher sub-food indexes such as Rice bread & other cereals (+0.9% y-o-y vs +0.7% y-o-y), Meat (+5.7% y-o-y vs +2.7% y-o-y), Oil & fats (+1.4% y-o-y vs +1.2% y-o-y) and Fruits (+1.1% y-o-y vs +0.9% y-o-y). Nevertheless, Alcoholic & tobacco inflation registered the same growth as the previous month, growing +0.2% y-o-y. For 1H20, food inflation soothed slightly to +1.2% y-o-y, compared to +1.3% y-o-y during 1H19. Meanwhile, Alcoholic & tobacco inflation eased to +0.2% y-o-y (vs 1H19:+1.3% y-o-y).

Contractions in Clothing, Housing and Furnishing components weighed down overall CPI – Costs for Clothing & footwear (-1.1% y-o-y vs May’20: -1.1% y-o-y), Housing, water, electricity, gas & other fuel (-2.6% y-o-y vs May’20: -2.6% y-o-y) and Furnishing, household equipment & routine household maintenance (-0.2% y-o-y vs May’20: -0.2% y-o-y) remained contracted due to subdued Footwear (-3.2% y-o-y), Electricity, gas & other fuels (-28.5% y-o-y) as well as Goods & services for routine household maintenance (-0.6% y-o-y). Moreover, Health (+1.1% y-o-y vs May’20: +1.2% y-o-y), Recreation services & culture (+0.6% y-o-y vs May’20: +0.7% y-o-y), Education (+0.8% y-o-y vs May’20: +1.0% y-o-y), and Restaurant & hotels (+0.3% y-o-y vs May’20: +0.9% y-o-y) has shown slower inflation growth during this period. However, Miscellaneous goods & services (+3.0% y-o-y vs May’20: +2.8% y-o-y) showed higher growths while Communication registered the same growth as previous month which is +1.6% y-o-y. For 1H20, only Clothing & footwear couple with Housing, water, electricity, gas & other fuel showed deflationary growth while other components posted mild inflationary growth.

East Malaysia as well as Melaka registered highest deflationary pressure; Selangor & Wilayah Persekutuan Putrajaya led the highest food inflation – Three states recorded highest deflationary pressure namely Sabah & Wilayah Persekutuan Labuan (-2.7%), Sarawak (-2.6%) and Melaka (-2.6%). However, Wilayah Persekutuan Kuala Lumpur (-1.3%) and Selangor & Wilayah Persekutuan Putrajaya (- 1.3%) registered the lowest deflation among others. Meanwhile, six states recorded higher food inflations (vs four states in prior month) due to higher food consumption during the recovery movement control order (RMCO), led Selangor & Wilayah Persekutuan Putrajaya (+2.5%).

Expect deflation to taper off further in 2H20 – We expect deflationary pressure to taper off further as almost all economic and social activities are gradually resumed since RMCO. However, amid pandemic outbreak and extension of Malaysia’s MCO till Aug’20, 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 the current OPR level will be maintained for the rest of 2H20 after recent OPR cut from BNM by another 25bps to 1.75% during latest MPC announcement. We deem the economic activities to gradually recover, with reopening of business activities as well as implementation of fiscal stimulus packages to spur private spending.

Source: JF Apex Securities Research - 23 Jul 2020