Slowing inflation, lessened the pressure for BNM to raise interest rates - Manokaran

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

THE market was generally range bound over the past week as the bond and currency markets continue to dominate the spotlight.

Trading activity slowed by around 5% on a weekly basis to RM1.88 billion per day last week as there were no major market catalysts in sight.

As such, the benchmark KLCI Index ended virtually unchanged on a week-on-week basis at 1,441.90 points as local institutional funds continued their buying support throughout the week.  

I am maintaining my trading range for the KLCI of between 1,430 and 1,450 points in the coming week given the low volatility in the stock market.

Bond yields in the US continue to rise especially on the longer tenured bonds following the release of the 3Q2023 GDP of the US which came in higher than expectations at 4.9% against 4.7% expected by the market.

In the meantime, everyone will be focused on the upcoming US Federal Reserve’s Federal Open Market Committee meeting on 31 October – 1 November 2023 and Bank Negara Malaysia’s Monetary Policy Committee meeting on 1-2 November 2023.

The benchmark Federal Funds Rate currently stands at 5.25% - 5.50% but the market now expects the FOMC to hold rates at the coming meeting and keep it at the current level till the second half of 2024 due to the stubborn inflationary pressures.  

OPR

Meanwhile Bank Negara Malaysia is expected to hold the Overnight Policy Rate at 3.00% to spur economic growth as slowing inflation has lessened the pressure to raise interest rates. 

UST 10-year yields fell slightly by 6 basis points to 4.85% as some profit taking kicked in and this was reflected in the local 10-year the MGS yield which fell by one (1) basis point last week to 4.11% due to local institutional funds soaking up the continued selling pressure from foreign bond fund managers.

Although the negative yield differential between the 10-year MGS and UST has narrowed slightly to 74 points, it remains very substantial and has already imputed an equivalent to 2-3 rounds of rate cuts.

This caused the local MGS market to remain comparatively overvalued against the US Treasuries and vulnerable to further sell offs in the future.

The Ringgit was generally on its back foot against other major currencies over the past week.

It continued to weaken against the US Dollar (+1.1sen) to RM4.7760, Singapore Dollar (+1.6sen) to RM3.4892 and Euro (+0.74sen) to RM5.0563 as foreign bond fund managers continue to sell their MGS holdings and repatriate their funds back to their respective countries but at a reduced intensity as compared to the previous week, thanks to the decline in the US Treasury yields last week and the interest hike pause by the European Central Bank.

Treasury yields in the US eased slightly as the personal consumption expenditure for September 2023 came in within expectations at 0.3% on a month-on-month basis and 3.7% on a year-on-year basis.

Given the reducing volatility risk through monetary policy measures, I am maintaining my expected USD-MYR range of between RM4.70 – RM4.80 for the coming week.   - DagangNews.com

Manokaran Mottain is an economist with many years of experiences with a number of financial institutions and is now managing his own firm, Rising Success Consultancy Sdn Bhd and has been writing his economic analysis on a weekly basis in DagangNews.com since 2022.      

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