Overbought momentum and caution over the path ahead for US interest rates given the stubbornly high inflation and economic growth numbers sparked profit-taking on healthcare, plantation and property counters last week. Australia’s higher-then-expected consumer prices and high US Treasury and European bond yields, which point toward inflationary pressures remaining high for a period, also forced investors to reduce exposure towards the weekend, amid caution ahead of the release of the key US core PCE index.

For the week, the local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) fell 22.72 points or 1.4 percent, to 1,596.68, as mild gains on Press Metals (+26sen) and Mr DIY (+1sen) were overshadowed by falls in Public Bank (-7sen), CelcomDigi (-24sen), TM (-29sen), KLK (-RM1.34) and Sime Darby (-17sen). Average daily traded volume last week slowed to 5.21 billion shares as compared to 6.04 billion shares the previous week, while average daily traded value stabilized at RM4.45 billion, against the RM4.46 billion average the previous week.

A possible recovery in share prices of blue chips could help anchor rebound in the FBMKLCI this week after the sharp pullback last week neutralized the prior overbought technical conditions. Foreign investors who largely sold down the market last week could return to nibble fundamentally solid blue chips after the US core personal expenditure (PCE), the preferred inflation gauge for the Federal Reserve, came within expectations last week. Key construction, property, healthcare and technology related lower liners, which went through sharp corrections should attract bargain hunters anticipating rebound upside ahead. However, the strength of the recovery could be dampened by China’s weaker than expected manufacturing purchasing managers’ index (PMI) for May.

The US core PCE for April, which excludes food and energy prices, rose 0.2% MoM and 2.8% YoY, slightly lower than the forecast 0.3% MoM increase but within the 2.8% YoY increase. Even the headline numbers came on the dot with forecast 0.3% MoM and 2.7% YoY. Most importantly, the wavering personal income and consumption data provided early signals that the high interest rate has started biting into the economy, which grew at an annualised rate of 1.3% in 1Q24, lower than the earlier estimate of 1.6%. Income and personal spending rose 0.3% and 0.2% MoM in April, lower than the 0.5% and 0.7%, respectively in March but both fell 0.1% after adjusting for inflation. It is a telltale sign that should alert the policymakers to be wary of their “higher for longer” interest rate stance.

In fact, after the release of this inflation data, the probability of a rate cut in September meeting has risen to 54.8% from 49.8% a week earlier, according to the CME FedWatch Tool. Thus, investors will be on the lookout for this Friday’s labour market data for May that will reveal the strength of nonfarm payroll, average hourly earnings and unemployment rate, which have great impact on inflationary pressures.

Meanwhile, China’s manufacturing PMI dipped to 49.5, below the expansion threshold of 50 and April’s 50.4 as demand for new orders and new export orders reverted into contraction after two months of growth, while the non-manufacturing PMI slipped to 51.1 versus forecast 51.5 and April’s 51.2. With continued softness in employment data alluding to weaker domestic demand, investors need to see some proof that the government’s recent rescue measures for the property sector will reverse the decline. If the trade data for May this week disappoints, expectations for greater and broader assistance from the government will grow, more so if the upcoming June data shows limited impact from government’s growth measures so far.

Source: TA Research - 4 Jun 2024