Brace for another interest rate hike by US Federal Reserve this week

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

THE local stock market staged a technical rebound over the past week as investors gingerly bought into stocks resulting in the KLCI Index staging a strong comeback from its technical support level of 1,420 points to end the week at 1,465.80 points (+47.36 points or +3.33%).

However, the gains were achieved on razor thin trading values which makes it doubtful if the recent gains can be sustained especially in the face of another imminent interest rate hike by the US Federal Reserve this week and the increasing possibility of a global economic recession next year.

The current resistance level for the KLCI remains at 1,485 points.  

Bond yields for both the 10-year US Treasuries (UST) and 10-year MGS yields ended the week at 2.76% and 4.01% respectively.

The buying of the US Treasuries continued for the second consecutive week widened the yield spread by 12 basis points and increased the yield spread between both countries’ 10-year bonds to 125 basis points.   

Nevertheless, the yield curve inversion between the US 2-year and 10-year Treasury notes remains which indicates that the fixed income market is expecting an economic recession in the near to medium term.

The yield to the US 2-year Treasury notes is 2.97% which is 21 basis points higher than the 10-year note.

At the current juncture, I continue to advocate a cautious approach towards the equities and fixed income markets as we could very well be in the eye of the economic storm.

With the worst of the COVID-19 induced economic fallout behind us, we still have to deal with the crushing inflationary pressures brought about by the disruption in supply chains and geopolitical tensions.  

ECONOMY

The European Central Bank (ECB) increased the interest rates for the first time in 11 years with a higher than expected 50 basis points to combat soaring inflation within the Eurozone which comprises of 19 countries.

This brings the deposit rates to 0%, the main refinancing operations rate to 0.5% and the marginal lending facility to 0.75%.

Department of Statistics Malaysia disclosed that Malaysia’s Consumer Price Index (CPI) rose by 3.4% year-on-year (y-o-y) to 127.4 points in June 2022 from 123.2 points in June 2021.

Food inflation continues to be the main driver for inflation in June 2022 with a 6.1% y-o-y increase.

Inflation for the transport segment rose by 5.4% followed by the restaurant & hotels segment (5.0%) furnishings, household equipment and routine household maintenance (3.4%), miscellaneous goods & services (2.2%) and recreation services & culture (2.2%).

The food dishes that posted the highest increases were roti canai (+10.5%), rice with side dishes (+9.7%), cooked beef (+7.8%) and noodle dishes (+7.0%).

The state with the highest inflation was Wilayah Persekutuan Putrajaya at 8.1% while Wilayah Persekutuan Labuan and Melaka posted the lowest inflation rate at 2.5%.  

Finance Minister Datuk Seri Tengku Zafrul Abdul Aziz said that the upcoming Federal Budget 2023 will take into account sustainability related initiatives and focus on economic reform efforts to enhance business competitiveness and value chain.

Budget 2023 will also continue to look into the income and social protection for Malaysian citizens.     

The Asian Development Bank (ADB) has cut its 2022 economic growth forecast for developing Asia to 4.6% from 5.2% as the region is struggling with inflationary pressures brought about supply chain disruptions due to the Russia-Ukraine conflict, lockdowns in China and rising interest rates.

The ADB also raised its inflation forecast for the Asian region to 4.2% from 3.7% on the back of surging food & fuel price and warned that the risks its economic outlook remains elevated.       

CURRENCY

The Ringgit continued to face selling pressure over the past week as the market continues to price in a potential 75-100 basis points rate hike to the Federal Funds Rate by the US Federal Reserve at their upcoming FOMC meeting on 26-27 July 2022.

The market is currently expecting 75 basis points hike but a 100 basis points hike will definitely come as a surprise even though some economists have been calling for such a hike. 

The Ringgit ended the week against the US Dollar at RM4.45 / USD1.00 (-0.1sen).

Given the proximity to the next FOMC meeting, I am further lowering the expected trading band for the Ringgit to RM4.42 to RM4.48 as fund outflows may continue especially if the US Federal Reserve hikes rates by 100 basis points which the currency markets have not factored in at all at the present moment as it will push the FFR rate to 2.50% which is above the current OPR rate at 2.25%.    

It was a tough week for the Ringgit as it lost ground against the other major currencies. The Ringgit weakened the most against the Euro at RM4.5456 / EUR1.00 (-5.9sen) and the British Pound at RM5.3435 / GBP1.00 (-6.5sen) following the rate hike by the ECB.

It also gave up ground to the Japanese Yen at RM3.2670 / JPY100 (-5.9sen) and the Singapore Dollar for the third consecutive week at RM3.2078 / SGD1.00 (-3.1sen). – DagangNews.com