The world will still continue to face high inflationary pressures in the near term - Manokaran

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

The local stock market extended its technical rebound over the past week with the KLCI Index ending the week higher at 1,492.23 points (+26.43 points or +1.80%).

Once again, the gains were achieved on thin trading volumes and values and the market may take a breather as it approaches the psychological 1,500 points barrier after moving above the previous resistance level of 1,485 points.

The local bourse rallied along with other regional stock markets on the possibility of a slow down in the pace of interest rate hikes after US Federal Reserve Chairman Jerome Powell acknowledged that the US economy is slowing and that future rate hikes by the US Federal Reserve will be data dependent. 

Bond yields for both the 10-year US Treasuries (UST) and 10-year MGS yields ended the week at 2.67% and 3.88% respectively.

The buying of both the local and US Treasuries notes continued for the third consecutive week but more aggressive buying in the MGS narrowed the yield spreads between both countries’ 10-year bonds by 4 basis points to 121 basis points.   

The yield curve inversion between the US 2-year and 10-year Treasury notes continues especially after the US reported that its 2Q2022 GDP contracted by 0.9% on a year-on-year basis.

All the signals still point to the US economy going into an economic recession in the near to medium term. The yield to the US 2-year Treasury notes is 2.89% and remains 22 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.

Equity markets could run ahead of itself as optimism over a slow down in the interest rate hikes going forward by central banks could be tempered by the start of an economic recession as commodity prices rebounded back last week with the price of Brent Oil back to almost US$110 per barrel.

This means that the world will still continue to face high inflationary pressures in the near term and may precipitate more interest rate hikes in the coming months.     

ECONOMY

Bank Negara Malaysia (BNM) said Malaysia’s official reserve assets amounted to US109.2 billion (RM485 billion) as at the end of June 2022.

For the next 12 months, the pre-determined short-term outflows of foreign currency loans, securities and deposits (which includes scheduled repayment of external borrowings by the government and the maturity of foreign currency Bank Negara Interbank Bills) amounts to US$8.15 billion. 

The Ministry of Agriculture and Food Industries has assured the country that Malaysia’s rice supply remains stable and is sufficient to meet the needs of people as we have not experienced any shortage in rice supplies despite challenges to the supply chain brought about by the COVID-19 pandemic lockdowns.

Currently, Malaysia’s paddy and rice output is around 70% of the nation’s requirements but the federal government has created rice stockpiles across the country to meet any unforeseen food crisis.

The current buffer stock stands at 221,311 metric tons and the government intends to raise to 250,000 tons by the year’s end.

Bernas, which is the nation’s sole rice importer, is currently importing up to 800,000 metric tons of rice annually from Vietnam, Thailand, Pakistan and India to meet the remaining 30% of the country’s needs.

The government is currently implementing measures and programmes to add more paddy fields and raise the national average paddy yield to 7 metric tons a hectare by 2030 from the current average yield of 3.5 – 4.3 metric tons a hectare in order to meet the targeted 80% rice self sufficiency level by 2030.

The prices of Malaysian rice is also among the lowest in the region as white rice is sold at RM2.60 per kilogram in Malaysia as compared to Singapore (RM8.52/kg), Brunei (RM5.60/kg), Indonesia (RM4.10/kg), Laos (RM4.00/kg), Vietnam (RM3.34/kg), Philippines (RM3.33/kg), Cambodia (RM3.20/kg) and Thailand (RM2.70/kg).

The Ministry of Environment and Water (MEW) disclosed that the federal government decided to maintain the water tariff for the domestic category (residential premises) in Peninsular Malaysia and the Federal Territory of Labuan in view of the rising cost of living faced by the public.

However, the government had also agreed to adjust the water supply tariffs for the non-domestic and special categories in both areas by an average of RM0.25 per cubic meter from 1 August 2022.

Nevertheless, MEW said that the amount of increase was still low and is insufficient to cover the actual cost of providing water supply services which currently stands at RM1.68 per cubic meter. 

CURRENCY

The Ringgit ended the week virtually unchanged against the US Dollar at RM4.45 / USD1.00 despite the 75-basis points rate hike to the Federal Funds Rate by the US Federal Reserve at their FOMC meeting on 26-27 July 2022 which brought the Federal Funds Rate to 2.25% - 2.50% which is above the current Overnight Policy Rate of 2.25%.   

As such, I am maintaining the expected trading band for the Ringgit against the US Dollar at RM4.42 to RM4.48 as fund flows will be stabilizing until the next BNM Monetary Policy Committee (MPC) meeting on 7-8 September 2022 which is followed by the US FOMC meeting on 20-21 September 2022.  

At the current juncture, economists are expecting the MPC and FOMC to raise the OPR and FFR by 25 and 50 basis points at their upcoming meetings respectively.   

However, the Ringgit lost ground against all of the other major currencies for a second consecutive week.

The Ringgit weakened the most against the British Pound at RM5.4190 / GBP1.00 (-7.5sen) and the Japanese Yen at RM3.3360 / JPY100 (-6.9sen).

It weakened against the Singapore Dollar for the third consecutive week at RM3.2233 / SGD1.00 (-1.55sen) and ended a shade lower against the Euro at RM4.5499 / EUR1.00 (-0.4sen).  – 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