Another OPR hike by Bank Negara is imminent - Manokaran

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

The benchmark KLCI Index ended the week slightly higher at 1,495.03 points (+9.48 points or +0.64%) on the back of positive sentiments across the region due to China’s full economic reopening on 8 January 2023 as well as portfolio rebalancing exercises by institutional funds.

Consequently, the average daily value traded last week picked up to RM2.15 billion, which is over 14% above the past 100-day average daily trading value of RM1.89 billion.

In the bond market, US bond yields continue to fall following the release of December 2022’s Consumer Price Index (CPI) which came in line with market expectations at 6.5% on a year-on-year (y-o-y) basis while core inflation fell 5.7% y-o-y.

As a result, the market is now raising its expectations that the US Federal Reserve may cut the quantum of increase for the Federal Funds Rate to 25 basis points from 50 basis points at its upcoming meeting at the end of January 2023.

The 10-year US Treasury (UST) yields fell by a meagre 6 basis points last week to 3.50% from 3.56%. This reduced the total yield gains over the past 20 weeks to 47 basis points.   

The UST 2-year yields similarly declined by 4 basis points to 4.22% from last Friday’s close of 4.26% and the yield curve inversion between the UST 2-year and 10-year notes continues into its 27th consecutive week. This caused the yield spreads to continue widening by two (2) basis points to -72 basis points from -70 basis points in the week before. The long-term average of the yield spread for both UST is +0.92% or +92 basis points.   

Buying activities in the local bond market picked up over the past week as the 10-year MGS bond yields fell for the second consecutive week by 8 basis points to 3.94% last Friday. The latest result kept the yield spreads between both countries’ 10-year bonds at 44 basis points.  

ECONOMICS

The Malaysian government will be imposing a 10% sales tax on low value goods (items that are priced below RM500) which are sold online and delivered from overseas to customers in Malaysia (which includes the duty free islands of Labuan, Langkawi, Tioman and Pangkor as well as special areas like free zones) by air, sea or land. The new tax is effective from 1 April 2023 onwards.   

Bank Negara Malaysia’s international reserves increased to US$114.6 billion as at 30 December 2022 from US$110.3 billion on 15 December 2022. The reserves position is sufficient to finance 5.2 months of imports of goods and services and is 1.0x the total short term external debt.

The Ministry of Tourism, Arts and Culture is looking to revamp the rating system for hotels and food & beverage premises in Malaysia in order to develop a clearer and more reflective way to rate their quality. Focus would be on basic standards of service quality and cleanliness of premises & washroom amenities. More details on the revised rating system will be disclosed on a later date.

The International Air Transport Association (IATA) disclosed that the global air cargo market declined by 13.7% year-on-year in November 2022 from November 2021 due to economic headwinds and uncertainties. It cited that shrinking global export orders and China’s rising Covid cases are key areas of concern and monitoring going forward. IATA added that Asia Pacific air cargo volumes contracted 18.7% y-o-y in November 2022 but this was mitigated by a 2.8% y-o-y rise in the Latin American sector.   

The Statistics Department revealed that the unit price index of cement rose 1.5% month-on-month in December 2022 due to the rising price of coal. Coal is used as the main energy source for the combustion process during the production of cement. In addition, the price of other construction materials such as bricks, plumbing materials and paints also posted increases last month.

However, the unit price of steel declined marginally by 0.4% m-o-m in line with the global prices driven by lower demand in China. In December 2022, the average price per unit of steel (mild steel round bars and Mycon 60 high tensile deformed bars) was RM3,576 per metric ton while the average price of cement (Ordinary Portland) stood at RM20.95 per 50 kg. Meanwhile the average prices of aggregates and sand was RM41.14 and RM36.30 per metric ton respectively. 

CURRENCY

The Ringgit rose sharply against the US Dollar last week gaining 1.6% to end at RM4.3335 / USD1.00 (-6.7sen) as it benefitted from the inflows in both the equity and bond markets which both gained traction over the week.  

However, the Ringgit lost ground against the other major currencies over the past week with the exception of the Singapore Dollar which slid marginally to RM3.2794 / SGD1.00 (-0.4sen). The local currency slid against the British Pound at RM5.2994 / GBP1.00 (+2.0sen), the Euro at RM4.6972 / EUR1.00 (+4.0sen) and the Japanese Yen at RM3.3680 / JPY100 (+5.8sen).

MY OPINION

This week, the local stock market would be focused on the Bank Negara Monetary Policy Committee Meeting on 18 & 19 January 2023.

Economists are forecasting a 25 basis points hike to the Overnight Policy Rate to bring it to 3.00% given the fact that the interest rate at this level remains accommodative to economic growth.

Barring any unforeseen developments, I expect the overall market would remain in a +/- 20 point range in the coming two weeks as we are heading into a long holiday weekend due to the Chinese New Year holidays. The next catalyst for the market would be the revised Budget 2023 on 24 February 2023.

The aggressive buying into the bonds by foreign investors helped to push the prices higher and yields to contract but the yield spreads between our local 10-year MGS yields and 10-year US Treasury Bills remained the same.

Nevertheless, I don’t think it will decline by a huge amount from hereon in light of the upcoming MPC and FOMC meetings this month in which the market is expecting both central banks to raise interest rates.

Once again, I would also like to highlight that it is doubtful that the bond market has factored in potential default risk for corporate bonds as central banks across the world are likely to hold interest rates at their peak levels for at least 6-12 months.    

In the currency market, the surprise development for the week was the decline of the US Dollar, which fell faster than expected due to the release of the CPI Index for December 2022.

In light of the weaker sentiments for the US Dollar, I am adjusting my view that the Ringgit will trade between RM4.30 and RM4.38 against the US Dollar in the coming week. - DagangNews.com

Manokaran Mottain has been an economist with a number of financial institutions is now managing his own firm, Rising Success Consultancy Sdn Bhd