The FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) suffered from an early selloff last week sparked by regional weakness after China’s GDP growth target of around 5% for 2024 failed to excite investors due to absence of concrete details. A profit-taking correction on Wall Street mid-week as investors fret over the global inflation and interest rate outlook and lacking domestic positive leads also dampened market tone. However, investor sentiment recovered towards the weekend on hints from the US central bank chief in the congressional testimony that interest rate cuts may not be far off if inflation pressures ease.

For the first week of March, the FBM KLCI added 1.84 points, or 0.12 percent, to 1,539.86, as gains in CIMB (+31sen), Maybank (+30sen), Genting Berhad (+28sen) and Genting Malaysia (+8sen) offset falls on Public Bank (-7sen), YTL Power International (-25sen) and YTL Corp (-10sen). Average daily traded volume last week shrank to 3.47 billion shares, compared to 4.51 billion shares the previous week, while average daily traded value declined to RM2.67 billion, against the RM3.92 billion average the previous week.

The FBMKLCI recovered towards the last weekend from a mid-week selloff as investors were encouraged by the congressional testimony by Federal Reserve Chairman that US interest rates will likely be reduced this year if inflation slows further. This expectation could cushion falls in the FBM KLCI, which witnessed heavy consecutive foreign selling since 28 February that led to a net outflow of RM2.1bn in just seven trading days, as bargain hunters continue to nibble mostly undervalued blue chip in anticipation of an eventual recovery.

As no major announcements are due this week locally apart from the industrial production index, which is expected to rebound by 2.0% YoY in January after a 0.1% YoY contraction in December, the broader focus should remain on the US monetary easing narrative and China’s economic revival. The US nonfarm payroll data for February that came out last Friday may test investors’ patience as the stronger than expected figure of 275,000 versus market expectations of 200,000 could prolong the Federal Reserve’s resolve to wait for solid signs of inflation heading towards its 2% target before lowering the interest rate. Despite the stronger payroll data, it is noteworthy to highlight that the reported figures for last December and January have been lowered by 43,000 and 124,000 respectively while the latest unemployment figure has risen to 3.9% from 3.7% in January. Average hourly earnings stood at 4.3% YoY, slightly lower than market expectations and January’s 4.4%. This mixed report should drive investors to be on the lookout for more clues to gauge the timing of the Fed’s first rate cut in this tightening cycle.

Thus, focus this week will be on the upcoming February US consumer price index, producer price index, retail sales and industrial production index. If the CPI remains flat at 3.1% based on consensus forecast or showed some strength, it could add to rising probability that an easing may not be due until July or later in the year. This could exert some downside pressure on the FBMKLCI as foreign outflows continue but can be checked if the core CPI eases to 3.9% YoY as forecasted from 3.7% YoY in January, and the services component of CPI that excludes shelter shows some pullback. The retail sales and industrial production are also expected to provide more clues on the US economy, which is widely expected to avert a recession despite the high interest rate biting into savings and affecting consumption. Retails sales is expected to rebound by 0.8% MoM after contracting 0.8% MoM in January.

On the other hand, a 0.7% YoY increase in China’s CPI that surpassed forecast of 0.3% and - 0.8% in January should assuage concerns about a deflationary spiral and add more clout to the nation’s recovery story after investors remained wary about its unchanged economic growth forecast of 5.0% in 2024. A growth in six months should buffer concerns about continued weakness in factory gate prices, which fell 2.7% YoY in February versus -2.5% YoY in the previous month due to holidays during the Spring Festival that halted demand for raw materials.

Source: TA Research - 11 Mar 2024