SUMMARY

● Global growth is expected to moderate from 3Q23 onwards as cumulative rate hikes among advanced economies are anticipated to weigh on domestic demand. However, China’s economic recovery, and growth from other emerging economies will likely lend some support to the global growth outlook.

● In 2H23, price pressures may continue to ease due to a slowdown in global economic activity, improvements in global supply chains, declining commodity prices and tighter financial conditions.

● The US Federal Reserve (Fed) is expected to keep rates unchanged for the remainder of the year, despite recent hawkish rhetoric. Rate cuts are anticipated to commence in 1Q24. Meanwhile, the Bank of England (BoE) and European Central Bank (ECB) are likely to continue raising rates aggressively due to persistently high inflation. The Bank of Japan (BoJ) may soon adjust its yield curve control, while the People’s Bank of China (PBoC) is expected to further cut key interest rates to boost China’s struggling economic recovery.

● The projected 10Y US Treasury (UST) yield is expected to remain elevated until the next US Federal Open Market Committee (FOMC) meeting. Following that, a sharp decline in yields is expected as the Fed advances towards rate cuts amid a possible mild recession in the US. We anticipate the 10Y UST yield to reach 3.25% by the end of 2023.

● Our Brent crude oil forecast remains unchanged at USD80.0/barrel (bbl) for 2023 (2022: USD99.0/bbl) as we expect OPEC+ output restraint until 2024, along with a gradual recovery in China’s economy and the resumption of international tourism, would provide support to oil prices despite heightened downside risks.

● Malaysia’s economic growth is projected to slow to 3.4% in 3Q23 (2Q23F: 6.0%) due to the diminishing lower base effect and expectations of a global economic slowdown that will weigh on the commodity and manufacturing export-oriented sectors. However, we maintain the GDP growth forecast for 2023 at 4.7% (2022: 8.7%) as domestic demand is expected to remain resilient thanks to the higher minimum wage, a lower unemployment rate, and continued government fiscal support measures.

● Headline CPI is expected to gradually decrease to 2.3% - 2.7% in 3Q23, influenced by domestic measures, external factors and a favourable base effect. However, potential upside risks such as the extreme weather conditions and increased inbound tourism activity, leading to a sustainable domestic demand growth, could push prices upwards. Nonetheless, the inflation rate is expected to continue trending lower and average around 2.9% in 2023.

● Due to the domestic disinflationary forces and elevated macro uncertainty, it is anticipated that Bank Negara Malaysia (BNM) will maintain the overnight policy rate (OPR) at its current level of 3.00% for the rest of the year.

● We have revised our end-3Q23 and end-2023 USDMYR forecasts to 4.51 (from 4.27) and 4.29 (from 4.11), respectively. However, our bullish case for the ringgit remains intact, as we anticipate a potential pick-up in China's economy and a dovish pivot by the Fed, coupled with favourable domestic factors, which may support the local currency.

● Domestic bonds are expected to remain relatively resilient, driven by strong foreign demand towards the end of the year, particularly as we anticipate BNM to have concluded its tightening cycle. We expect the 10Y Malaysian Government Securities (MGS) yield to settle at 3.60% by end of 2023.

Source: Kenanga Research - 5 Jul 2023