OVERVIEW

● After two months of expansion the Manufacturing Purchasing Managers Index (PMI) dipped below neutral 50.0 mark to 49.2 in October (Sep: 51.5), pointing to a sluggish business conditions at the start of 4Q18. According to IHS Markit survey report released yesterday, the deterioration in the operating manufacturing conditions reflected a reduction in new sales influenced by the weak domestic market and recently-implemented Sales & Service Tax (SST).

● Output and new work declined but export orders rise. According to the report, output inched lower than in the preceding month while new work fell at the fastest pace in five-months. Subsequently, incomplete workloads declined in October, but the rate of depletion was only modest. Although new work fell due to weak domestic demand, new export orders from overseas particularly from the US and other countries in South East Asia increased sharply in ninemonths. We believe the US firms has started to shift its main source of imports from China to South East Asia including Malaysia to avoid the higher tariffs set by the Trump’s administration on China as trade war intensifies.

● The rate of inflation in October was the fastest in almost a year associated with detrimental exchange rate movements, rising raw material prices and the implementation of SST. Consequently, the cost pressure has influenced a reduction in the buying activity as firms raised prices. Meanwhile, the ringgit continued to weaken in October against the dollar as USDMYR was traded between RM4.1380 to RM4.1842, compared to RM4.1290 to RM4.1477 in September. We expect inflation in the 3Q18 to increase but remain subdued as the inflationary impact of rising cost-push inflation would partly be mitigated by the relatively low and stable fuel prices (RON95) courtesy of the return of fuel subsidy. Year-to-date, the CPI YoY growth rate has moderate to 1.2% (Jan-Sept) compared to 3.9% in the same period a year ago. Hence, we maintain our inflation forecast for this year of between 1.0-1.5% (2017: 3.7%).

● Mix regional manufacturing conditions. In the US, October data pointed to another strong month for the manufacturing sector, with overall business conditions improving at the fastest pace in five-months. According to IHS Markit, the US Manufacturing PMI expanded to 55.9 in October, up from 55.6 in September largely due to improved rates of new business and employment growth which offset a slight declined in production growth. Hence, this would reaffirm the expectations that the Fed would raise interest rate again in December. Meanwhile China’s PMI inched up to 50.1 in October from 50.0 point in the preceding month indicating a weak expansion in the overall manufacturing sector due to concerns over subdued domestic market conditions and the impact of tariff hikes on its exports by the US. Meanwhile, while Indonesia’s PMI slowed to 50.5 in October from 50.7 in September, Thailand PMI, however, slipped to 48.9 from 50.5 September.

● We expect the US resilient economy and China’s government plan to boost its domestic economy as trade war hit its manufacturing growth could significantly improve Malaysia’s export fortunes in the upcoming months. Hence, we maintain our view that GDP growth to moderate in the 2H18 to 4.7% from 4.9% in the 1H18, resulting our whole year 2018 growth forecast to slow to 4.8% from 5.9% in 2017.

Source: Kenanga Research - 2 Nov 2018