Manokaran: KLCI benchmark to continue consolidating within 1,400-1,450 point 

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

AS expected, the overall market ended the week on a lower note with the benchmark KLCI Index closing off the week at 1,422,92 points (-8.12 points or -0.56%).

Trading volume recovered by almost 16% on a week-on-week basis to RM1.75 billion per day from RM1.51 billion per day last week as traders returned to the market fin earnest. Nevertheless, the overall trading value is still somewhat lackluster as it was 11% below the past 100-day average daily trading value of RM1.97 billion per day.

In the bond market, US bond yields continued with their consolidation phase despite key inflation reports coming in broadly either within or lower than expected in the past week.

The Consumer Price Index for April 2023 was just marginally lower than consensus at 4.9% on a year-on-year (y-o-y) basis while rising 0.4% month-on-month (m-o-m) from March 2023 which was in-line with expectations.

The Producer Price Index for April 2023 posted a 0.2% m-o-m increase which was also slightly lower than the 0.3% increase that economists expected.  Meanwhile, weekly jobless claims increased by 22,000 to 264,000 which reflects a slowing economy.

The 10-year US Treasury (UST) yields remained steady as it rose by two (2) basis point to 3.46% from 3.44% in the previous week and increased the total yield gains over the past 52 weeks to a meagre 53 basis points.   

The UST 2-year yields also rose last week but by a higher quantum of seven (7) basis points to 3.99% from last Friday’s close of 3.92%. This continues the yield curve inversion between the UST 2-year and 10-year notes into its 44rd consecutive week with the yield spreads widening to -53 basis points from -48 basis points last week.  

However, the 10-year MGS bond yields fell by seven (7) basis points to 3.64% from 3.71% last Friday causing the yield spreads between both countries’ 10-year bonds to continue narrowing to 18 basis points from 27 basis points last week.

ECONOMICS

Malaysia’s 1Q2023 GDP grew by a better than expected 5.6% y-o-y due to an expansion of household spending, continued investment activity, improving labour market and higher tourism activities. The continued strength in the labour market is expected to support and sustain domestic demand going forward.

Malaysia’s current account balance for 1Q2023 recorded a surplus of RM4.3 billion supported by net export of goods totaling RM39.9 billion. However, the surplus amount was much lower from RM27.5 billion surplus in the previous quarter. This was due to a decrease in exports of goods by 17.6% to RM261.5 billion during the quarter while imports of goods fell 14.6% to RM221.6 billion. 

The main exports were electrical & electronics and petroleum & chemicals products to Singapore, China and United States of America while Malaysia’s imports were Intermediate, Capital & Consumption goods came from China, Singapore & Taiwan.

The services account posted a higher deficit of RM12.8 billion in 1Q2023 due to a lower surplus recorded from the travel industry and a deficit incurred by the construction sector. Meanwhile , the financial account registered a net outflow of RM2.4 billion from RM1.1 billion in the preceding quarter.

In 1Q2023, Malaysia’s International Investment Position registered a net asset of RM84.5 billion while Malaysia’s International Reserves stood at RM509.8 billion.   

Malaysian Institute of Economic Research (MIER) disclosed that its Consumer Sentiment Index for 1Q2023 fell by 6.1 points on a quarter-to-quarter (q-o-q) to 99.2 points while its Employment Index also fell by 12.7 points q-o-q to 109.8 points. The result of the survey indicated that Malaysian’s are more pessimistic with regards to future finances, job opportunities, income growth and inflation.

CURRENCY

The Ringgit was mixed against the major currencies over the past week. The local currency only gained against the Euro at RM4.8700 / EUR1.00 (-2.20sen) and remained unchanged against the Japanese Yen at RM3.30 / JPY100, British Pound at RM5.5960 / GBP1.00 and the Singapore Dollar at RM3.350 / SGD1.00.

However, it surprisingly weakened against the US Dollar at RM4.4750 / USD1.00 (+4.00sen) indicating that safe haven remain in play among the currency traders for the time being.  

MY OPINION

It was unsurprising that the local equities market ended weaker last week as I had earlier warned that the market cannot sustain an upward push when the overall market breadth is consistently negative.

Going forward, trading volume will be temporarily boosted by a few IPOs due to be listed on the market in the coming weeks but their effect on the overall market direction is insignificant. 

With very minimal local news flow expected in the coming week, I am maintaining my view that the benchmark KLCI to continue consolidating within the 1,400 to 1,450 point range.     

I expect the US bond markets to consolidate from here-on until the interest rate downcycle begins as the UST yields have moved way ahead of the interest rate normalization process.

At the current level, the UST 10-year yields are back to their similar levels in the middle of June 2022 and September 2022 when the Federal Funds Rate (FFR) stood at 150-175 basis points and 300-325 basis points respectively from the current 500-525 basis points.

This means that the UST yields have already priced in a massive 200 basis points cut in the FFR (on a conservative basis) and yields are likely to stay put around these levels (barring any unexpected black swan events) until the US Federal Reserve actually starts to cut the FFR, which is likely to begin only in 2024 judging from the strength of inflationary pressures.

Hence, I am maintaining my view that UST bond yields will trade around (+/- 15 basis points) in the coming weeks.

Going forward, I am adjusting my view that the Ringgit is expected to trade between the RM4.42 - RM4.50 in the coming week.

A technical rebound is likely to occur in the near future as currency traders start to reflect the impact of raising the debt ceiling further in the US in the coming week.  - DagangNews.com

Manokaran Mottain has been an economist 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