OPR hike: Monetary policies remain accommodative to support economic growth - Manokaran

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

BANK Negara Malaysia has raised the Overnight Policy Rate (OPR) by another 25 basis points to 2.75% on 4 November 2022.

The ceiling and floor rates of the OPR corridor were correspondingly increased to 3.00% and 2.50% respectively. This is the fourth consecutive 25 basis points hike to the OPR this year. 

BNM said the decision to increase the OPR was to pre-emptively manage the risk of excessive demand on price pressures against a backdrop of continued positive growth prospects for Malaysia.

At the current OPR level, the stance of monetary policy remains accommodative and supportive of economic growth.

MARKET

The local equities market was mostly range bound last week with the benchmark KLCI Index closing the week marginally lower 1,438.28 points (-9.03 points).

Overall trading volume and values continue to remain low with the daily trading values still averaging below RM2.0 billion a day.

Therefore, I expect the KLCI Index to continue trade between 1,420 – 1,480 points in the coming week.

Meanwhile, bond yields across the duration curve rebounded following the latest US Federal Reserve’s Federal Open Market Committee (FOMC) meeting last week, which saw the fourth consecutive 75 basis points hike to the Federal Funds Rate (FFR) bringing it a target rate of 3.75% - 4.00%, which is also its highest level since January 2008.

The US Federal Reserve said that the terminal rate for the FFR maybe higher than expected due to the stubborn inflationary pressures and that it may hold interest rates longer than expected at the terminal rate before a policy pivot to its current stance occurs.

In the September 2022 forecast, the US Federal Reserve officials had projected a median rate of 4.60%, which implies a FFR target rate of 4.50% to 4.75%.   

Bond yields for the 10-year UST rebounded back by 15 basis points over the past week to 4.16% from 4.01% following the FFR hike and brings the total yield gains for the last ten weeks to 113 basis points.

Similarly, the UST 2-year yields also spiked by a sharp 24 basis points to 4.65% from last Friday’s close of 4.41%. The yield curve inversion between the UST 2-year and 10-year notes heads into its 17th consecutive week. The yield spreads continue to widen for the second consecutive week to -49 basis points from -40 basis points in the week before. The long-term average of the yield spread for both UST is +0.92% or +92 basis points.   

However, the local government bonds yield only rose slightly last week with the yields for the 10-year MGS bonds rising by just 2 basis points to 4.35% from 4.33% last Friday.

This narrows the yield spread for both countries’ 10-year bonds to just 19 basis points from 32 basis points last week.  

The razor thin yield spreads between the UST and MGS will put the MGS yields under pressure in the near term until the US Federal Reserve pauses or slows down the pace of interest rate hikes.

This may occur at its next FOMC meeting in December 2022 whereby the market is forecasting a 50 basis points hike to the FFR.

CURRENCY

The Ringgit weakened further against the US Dollar to a new all-time low against the US Dollar at RM4.7460 / USD1.00 (-2.6sen) at the end of the week on the back of further sell off in both the bond and equity markets.

This follows the 75-basis points rate hike to the FFR, which widened the interest rate differential against the OPR to 100 basis points. 

In light of the recent developments, I am adjusting the trading band for the Ringgit to between RM4.70 to RM4.80 for the time being as the US Federal Reserve is likely to continue raising the FFR by another 50 basis points at its 13-14 December 2022 meeting.

The Ringgit also ended on a weaker note against most of the other major currencies during the week.

It closed lower against the Japanese Yen at RM3.2330 / JPY100 (-3.9sen), the Singapore Dollar at RM3.3827 / SGD1.00 (-3.7sen) and the Euro at RM4.7273 / EUR1.00 (-3.1sen).

However, the Ringgit staged a strong rebound against the British Pound after fourth consecutive weeks of declines to end the week at RM5.4025 / GBP1.00 (+7.3sen) as the market prepares for the release of the Mid Term Fiscal Plan by the new government led by Rishi Sunak on 17 November 2022.

The Mid Term Fiscal Plan will contain a comprehensive plan to ensure sustainable public spending and reduce debt.

POLITICS

The 15th General Election (GE15) will be the most intensely contested elections in the history of Malaysia with 945 candidates vying for the 222 parliamentary seats at stake.

This is a 37.5% jump from the 687 candidates who contested in the 14th General Elections in 2018.  

There were no walkover victories at the conclusion of the nomination day on 5 November 2022 and almost all of the parliamentary seats will be at least a three-cornered fights with the most intensely contested seat being the Batu parliamentary constituency, which will see candidates from six political parties and four independent individuals contesting for the seat.

In total, Pakatan Harapan fielded the most candidates at 206, followed by Barisan Nasional (178), Perikatan Nasional (149), Parti Pejuang Tanah Air (116), Parti Warisan (52), Gabungan Parti Sarawak (31), PAS (22) and Gabungan Rakyat Sabah (13).

In addition, there will also be a record 108 independent candidates contesting in GE15, the largest number ever for independent candidates. 

Prime Minister Datuk Seri Ismail Sabri Yaakob said he will be adopting a casual and harmonious approach to his campaign and reiterated that the government will implement all of its proposals made through Budget 2023 for the benefit of the people.

He added that it is up to the Election Commission to decide whether to postpone GE15 if the country is hit by massive flooding.   - 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