Traders expect OPR to be kept at 3%

The anticipated rate-hold by Bank Negara was strengthened after the recent releases of weak Malaysian data, comprising the July consumer price index (CPI) and 2Q23 GDP.

GLOBAL bond market movement was generally mixed in the week. Longer maturity global bonds, encompassing tenors of 10-year and longer, posted gains.

Bond yields, which move in the opposite direction of bond prices, fell on these longer maturities, aided by releases of global inflation data which were in line with expectations, as well as weaker-than-expected US second quarter gross domestic product (GDP) (2Q23), and lower-than-expected US job openings.

However, short tenor global bonds, especially on two-year benchmark maturities, posted modest weakness as traders anticipate global central banks to sustain monetary policy tightening via rate hikes.

Higher policy interest rates influence the level of market rates, and usually leads to higher bond yields.

Amid the mixed global bond market performance, Malaysian government bonds posted modest gains.

Ahead of the week’s close, the benchmark three-year Malaysian Government Securities (MGS) was little changed on week-on-week (w-o-w) basis at 3.47% while the longer 10-year MGS was down two basis points (bps w-o-w) at 3.83%.

The sustained strength in MGS was also due to traders’ anticipation that Bank Negara may hold its Overnight Policy Rate (OPR) at 3% at the next Monetary Policy Committee scheduled for Sept 7.

The anticipated rate-hold was strengthened after the recent releases of weak Malaysian data, comprising the July consumer price index (CPI) and 2Q23 GDP.

To recap, Malaysia’s July 2023 headline CPI rose 2% year-on-year (y-o-y) compared with 2.4% y-o-y in June.

Core inflation, which excludes volatile and price-controlled items, also eased to 2.8% y-o-y in July 2023 (June 2023: 3.1% y-o-y).

Meanwhile, Malaysia’s 2Q23 GDP grew 2.9% against our expectation for a stronger print of 3.9% to 4.4%.

The ringgit was modestly stronger by about 0.2% w-o-w, hovering near the 4.640 level ahead of the weekend.

The ringgit was supported by the US dollar showing downside in the past week.

The US dollar index was last seen hovering near the 103.66 level, down from weekly high of 104.29

The ringgit was further supported by the steadier Chinese yuan. The US dollar/yuan pair fell to a weekly low of 7.2515 (from a weekly high of 7.2945).

The yuan was buoyed by firmer reading in China’s manufacturing Purchasing Managers Index (PMI) albeit it is still below 50-level growth threshold.

It has received continued support from the central bank via measures to boost China’s stock market.

China’s official PMI rose to 49.7 in August from 49.3 in July.

Further support for the ringgit was provided by higher global crude oil prices (Brent was up about 4% w-o-w), which in turn was aided by weak US dollar and anticipation of further output cuts by Russia and the Organisation of the Petroleum Exporting Countrier and allies.

Traders remained wary that the US Federal Reserve (Fed) will continue to hike interest rates this year.

At the recent Jackson Hole Symposium of global central bankers, Fed chair Jerome Powell remarked that the Fed is ready to raise rates and hold it at a high level until inflation shows signs of slowing towards Fed’s 2% target.

European Central Bank President Christine Lagarde did not specifically indicate an impending rate hike but said rates in Europe would need to stay high “as long as necessary” amid the still-high inflation.

Global inflation data releases last week include the US PCE (Personal Consumption Expenditures) price index at up 0.2% m-o-m in August 2023 (which met market expectations compared with up 0.2% in July) and at 3.3% y-o-y. Core PCE was also in line with expectations at up 0.2% m-o-m.

Meanwhile, the eurozone flash August consumer price index (CPI) beat expectations at up 0.6% m-o-m in August (expectations: up 0.4%) but was in line with expectations at up 5.3% y/y. Eurozone core CPI were also in line, at up 0.3% m-o-m and up 5.3% y-o-y.

Aside, the second estimate of the US 2Q23 GDP was revised down to up 2.1% quarter-on-quarter (q-o-q)compared with the advance estimate of 2.4% q-o-q.

The GDP price deflator was marked down to 2% compared with the advance estimate of 2.2%.

Germany’s 2Q23 GDP was flat on quarterly changes and contracting by 0.2% y-o-y.

The United States also reported lower-than-expected job openings (July actual at 8.83 million jobs compared with consensus 9.47 million jobs).

Prepared by the AmBank Economic Research team.

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