Global bonds reverse gains
INVESTORS have drawn out the “higher-for-longer” sentiment and trimmed their interest rate cut outlook, following the robust non-farm payroll data last Friday.
Over the week, a set of upside surprise US economic data alongside a chorus of Federal Reserve (Fed) officials’ speeches, which were slanted towards the hawkish side, further nudged investors to reprice on their rate cut outlook, effectively pushing the US Treasury (UST) yields weaker and the US dollar higher.
On Monday, the Institute of Supply Management Services purchasing managers’ index or PMI slightly surprised to the upside at the 53.4 level in January 2024, a much faster growth indication compared to December’s 50.5 level (consensus was looking at 52).
An additional surprise was that the prices category saw a whopping growth at 64, which may suggest rebounding inflationary pressures in the future.
This was its highest level last seen in February 2023. By the end of that day, the UST two-year yield jumped 11 basis points (bps) while the 10-year yield surged 14 bps.
US employment up
In addition, the number of people claiming unemployment benefits fell to 218,000 from the prior week’s upwardly revised to 227,000 (consensus: 220,000), which indicates people are still getting employed even during elevated interest rate levels.
Progressing towards the end of the week, we saw US Fed officials continue to reiterate the need to stay firm before cutting interest rates.
In other words, the central bank is in no hurry to change its monetary policy stance.
Richmond Fed president Thomas Barkin (voter) said the central bank needs to be patient despite the “remarkable” disinflation progress.
Also, Cleveland Fed president Loretta Mester (voter) said policymakers will gain more confidence later this year to cut rates if the economy evolves as expected.
The UST 10-year yield soared 27 bps for the week, erasing the prior week’s losses, and the twoyear yield also soared 25 bps.
According to the CME Fedwatch tool, the possibility of a Fed rate cut during the March meeting is already out of the picture, while the probability of a 25-bps cut in the May 2024 meeting had dropped from around 60% last week to 53.4% as of the time of writing.
In the onshore bond market, both the Malaysian Government Securities or MGS and Government Investment Issue or GII managed to hold their ground throughout the week and closed mixed with buying interests on shorter and ultra-long tenors despite the weaker sentiment seen in global bonds.
The MGS 10-year yield closed at 3.80%, relatively stable compared to last week’s closing of 3.79%.
Mixed picture
Domestically, Malaysia’s economic data released provided a mixed picture in terms of upcoming months’ prospects.
The industrial production index (IPI) fell by a slight 0.1% during December 2023, after a 0.6% year-on-year (y-o-y) growth in the prior month.
The subdued reading can be attributed to the shrinking of manufacturing productions, specifically the electrical and electronics and petroleum, chemical, rubber and plastic sub-categories.
To note, the market forecast was looking at a 0.7% y-o-y growth.
For full-year 2023, the IPI growth was at 0.9%, much slower than the 2022 reading of 6.7%.
On the other hand, retail sales posted faster growth at 5% y-o-y during the same month, up from 4.4% y-o-y in November 2023.
This translates to a 9% y-o-y growth throughout 2023, though much slower than the 23.9% y-o-y full 2022 growth when the economy was recovering from Covid related restrictions.
Coupled with the double-digit growth in motor vehicles at 12.3% y-o-y (2022: 47.6% y-o-y), these underpin still healthy private consumption, buoying the growth in the economy amidst a subdued external trade.
Recovery in trade
On the outlook, we expect the economy to grow by 4.5% in 2024, as global trade already bottomed out and started to recover.
This is in line with the International Monetary Fund’s (IMF) expectation of 3.3% global trade growth in 2024.
In the foreign-exchange market, the US dollar index (or the DXY index, which is a measure of the US dollar’s value relative to a basket of foreign currencies) found fresh new supports throughout the week and chalked up 1.1% gains by the end of Thursday.
Against the dollar, traders sold off Japanese yen the most (2% fall on the week), as the Bank of Japan’s deputy governor Shinichi Uchida said the central bank rules out raising rates rapidly when exiting the negative interest rate policy.
Domestically, the interest rate outlook repricing pushed the ringgit weaker as the US dollar-to-ringgit pair approached the 4.78 level.
Looking ahead, investors will focus on US January retail sales to gauge a clearer picture of US consumer consumption amid the recent series of upside surprises in indicators.
The Bloomberg consensus is currently looking at a 0.2% monthon-month (m-o-m) growth, slower than 0.6% m-o-m in December 2023.
We posit that global bond and foreign-exchange market volatilities continue to be on the upside as investors remain focused on signs of US economic resiliency, or the lack thereof.