Tuesday, February 7, 2017

In Malaysia, the central bank sounded relatively neutral in the latest MPC meeting held on 19 Jan. It highlighted expectation of higher headline inflation in 2017 (2016 inflation was 2.1% 2016), but core inflation is anticipated to remain stable. Furthermore, policymakers also stated that the Ringgit has seen signs of stability along with EM peers, following the sharp adjustments at end 2016. Overall, we think that there is little clue that Bank Negara will shift its policy stance in the near term, assuming stable conditions for the Ringgit and mild inflationary pressures.

Attached is the monthly market commentary for Jan 2017. We have included the near term outlook for the month of Feb 2017.
  • The Jan NFP recorded job gains amounting to 227k, above consensus of 180k and prior month’s 157k. Meantime, the unemployment rate inched higher from 4.7% to 4.8% during the same period, but sentiment was slightly dampened by the weaker-than-expected Jan average hourly earnings (+0.1% mom vs consensus +0.3% mom).
  • USD is expected to continue on its downward trend which began in early Jan as markets continue to reassess expected economic performance in the US and implication on monetary policy. Fed members have been sounding slightly less hawkish recently and that has resulted in paring of USD strength. This is partly due to the reassessment of overly-optimistic prognosis of fiscal splurge by the new administration and also the recognition that economic data out of Europe and Asia has been pointing upwards.
  • In our opinion, market volatility is likely to sustain as investors continue reacting on the new president’s policy directions and Fed members’ statements. We think that the curve will remain steep, as players are generally expecting 2-3 rate hikes this year. The 10T is currently trading around 2.46%. Pending further signals from the Fed members, as well as expansive fiscal policies to be announced be the new US government, we see yield topside to be capped this month (our immediate view is 2.45-55% range), with the market not fully pricing in a Fed move in the Mar FOMC meeting (30% probability according to Fed funds futures trading).
  • In Malaysia, the central bank sounded relatively neutral in the latest MPC meeting held on 19 Jan. It highlighted expectation of higher headline inflation in 2017 (2016 inflation was 2.1% 2016), but core inflation is anticipated to remain stable. Furthermore, policymakers also stated that the Ringgit has seen signs of stability along with EM peers, following the sharp adjustments at end 2016. Overall, we think that there is little clue that Bank Negara will shift its policy stance in the near term, assuming stable conditions for the Ringgit and mild inflationary pressures.
  • In addition, foreign players were heard showing improved buying interest in late Jan, which may provide further support to Ringgit bonds in the near term. We are cautiously optimistic in the near term, and see potential downside adjustment in yields by another 5-10bps across the curve after the positive movements in Jan.
  • In Thailand, looking ahead into Feb, we are biased towards a steeper THB curve mostly by increasing supply of 10-year LB26DA, 50-year LB666A, 20-year LB316A, and 30-year LB466A with totaling issuance size of Bt49billion. Moreover, headline CPI expanded at 1.55% yoy in Jan, a second consecutive month of above 1% expansion as energy prices rose on optimism of a global oil production cut. Meanwhile, short-dated yield should not trade far away from the 1.50% policy rate and we expect the MPC will keep policy rate unchanged (8 Feb MPC meeting). That being said, we expected widening of the 2x10 (LB) spread with the target of 120bps.
  • In Indonesia Relatively low and stable domestic inflation and attractive yields should support domestic bonds in the medium to longer term period. Improving current account balances should also be positive for domestic bonds. Stronger economic growth could improve the government’s ability to meet its target tax revenue, thus positive for its budget. But on the flip side, major negative factors include pricing in of aggressive rate hikes by the Fed in 2017 and signs of accelerating domestic inflation (due to the rainy season and electricity tariff adjustments). That being said, we see inflation of +3.7% yoy in Feb, or a monthly inflation of 0.13%.
  • As we indicated before, Bank Indonesia has introduced a new mechanism for monetary operations, called the Variable Rate Tender, which in our view is expected to bring average 3-month JIBOR to 6.25% at end-2017, against the current rate of around 6.75-7.00%. Correspondingly, CIMB Niaga expects Indonesian bonds to yield 7.00-7.50%, against its earlier forecast of 7.30-7.80% throughout 2017.

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