Given the current pace of economic growth, government expected to cautiously roll out rationalisation process - Manokaran

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

THE local stock market continued to edge higher over the past week propelled by net foreign institutional buying as foreign investors continue to rebalance and reposition their emerging market portfolios now that the interest rate cycle has peaked in the US.

This momentum helped push the KLCI Index to end the week higher by 21.75 points to 1,533.55 points (+1.44%). Trading volume in the market rose to RM2.15 billion per day last week from RM1.89 billion per day in the previous week.

With the KLCI now closing consistently above the psychological support level of 1,500 points, I expect it to trade between 1,515 points and 1,550 points in the coming week.  

US Treasury yields rebounded back over the past week as the US Consumer Price Index (CPI) for January 2024 unexpectedly rose 0.3% and 3.1% on a monthly and yearly basis.

In addition, the latest initial weekly jobless claims for the week came in at 212,000 which was slightly lower than the previous week’s figure of 220,000 claims which suggested continued strength in the US labour market.

Both developments took the bond market by surprise and raises uncertainty over the time horizon on interest rate cuts by the US Federal Reserve as they have disclosed that any decision going forward will be data dependent.  

Consequently, the UST 10-year yields rose 8 basis points to 4.27% level following January’s 2024 CPI release in the US as bond traders dialed back their expectations for the Federal Reserve to start cutting the Federal Funds Rate (FFR) in March 2024.

The 10-year yield currently prices in a 98 – 123 basis points reduction for the medium term from the current FFR rate of 5.25% - 5.50%.

Meanwhile, the local 10-year the MGS yield rose a further four (4) basis points to 3.85% which widened the negative yield differential to 43 basis points.

The Ringgit remains on its back foot despite the in-flows in the equities market as it continued to lose ground to the major currencies over the past week.

The local currency ended the week lower against the US Dollar at RM4.78 (+4.0sen), the Singapore Dollar at RM3.55 (+2.0sen) and the Euro at RM5.14 (+1.0sen).

However, it gained against the Pound Sterling at RM6.00 (-1.0sen). The Ringgit’s movement was within my expectations and I am maintaining my USD-MYR trading range at RM4.70 – RM4.80 as the US Dollar strength is likely to remain elevated until the market gets more clarity from the US Federal Reserve on their timeframe to cut interest rates.     

During the week, Department of Statistics Malaysia disclosed that Malaysia’s economy in 4Q2023 grew by 3.0% which brings the full year GDP growth for 2023 to 3.7%.

However, on a quarter-on-quarter basis, the GDP was 2.1% lower than 3Q2023’s reading of 3.3%.

The growth was primarily driven by the services sector with all other key sector posting growth numbers except the manufacturing sector which declined by.

Inflation remained at 1.5% in December 2023 which brought the full year headline inflation for 2023 to 2.5%.

In my opinion, the economic growth for Malaysia in 2024 is estimated to come in between 3.5% - 4.5% underpinned by an expected recovery in the global economy.

Expanding tourist arrivals will assist recovery in domestic demand growth, which is also supported by continued employment and wage increases in the local economy.

If the projected recovery in exports fail to materialise and the manufacturing sector continues stagnate, then my GDP projections will be further lowered to between 3.0% - 4.0%.

Meanwhile, inflation for 2024 is expected to continue moderating lower due to lower cost pressures and steady domestic demand but upside risks to inflation for 2024 is expected to come from the price control & subsidy rationalisation process in the second half of the year.

However, given the current pace of economic growth, I expect the federal government to cautiously roll out the rationalisation process and hence expect full year headline inflation for 2024 to trend lower to between 2.0% to 2.5%. - DagangNews.com