US Treasuries saw little movement on Friday but were still supported by safe haven demand. On the heels of Trump threats of further place tariffs on China, the EU was heard that it would start implementing tariffs on $3.2b of imports from the US. Heard in the past week was Trump threatening to impose tariffs on further $200b of Chinese imports, if China retaliates on the US’ earlier imposition of tariffs on $50b of Chinese products.
On the flipside, negative sentiment on UST were last week’s Powell’s reaffirmation the Fed will continue its gradual hikes after the central bank had hiked to 1.75-2.00% over a week ago. Meantime, the Treasury Department will sell $206b of securities in the coming week including bills. Notes auction comprise $34b of the 2T, $36b of 5T and $30b of 7T.
Malaysian government bonds consolidated, to show some signs of recovery after recent risk aversion moves away from emerging markets, as EM stock markets rose off lows on Friday. The USD/MYR pair was seen rising to above 4.0160 mid-week after hovering below 4.000 a week ago as the USD gained to its highest since July of last year. At the same time, the 5y Malaysian government securities (MGS) rose 6bps to 3.87% for the week but was unchanged Friday.
We think risk aversion away from the EM could find some exhaustion if it hasn’t already. USD/MYR went back to near 4.000 by late Friday. We think a continuous pricing of monetary policy and pre-emptive US rates communication will moderate this so-called EM strife. The Fed has moved to signal four hikes in 2018 but ECB has turned its back on its hawkish signal as we mentioned. Meantime, the BoJ has maintained its policy rate and QE program. As such, we expect EM resilience to accompany in the medium-term though USD could maintain some strength. We expect Malaysian bonds to be supported in the coming week. We further opine that macro conditions remain supportive for bonds, as GDP growth is anticipated above 5% and inflation still benign – which in turn indicates stable interest rate movement in Malaysia well into 2019.
Malaysia had reported headline inflation nudging up to 1.8% yoy in May (CIMB: +2.0% yoy, Bloomberg consensus: +1.8% yoy, Apr: +1.4% yoy), amid the low base in fuel inflation. In comparison, core inflation was unchanged at +1.5% yoy in May. Our CIMB economist says to account for downward consumer price adjustments resulting from the GST cut, the reintroduction of the sales and service tax (SST) in Sep, and curbed spillover effect from global oil prices to retail RON95 petrol and diesel prices, she is revising down CIMB’s 2018 headline inflation forecast from 2.6% to 1.3%, which is well below Bank Negara Malaysia’s policy target of 2-3%.
On Friday, IndoGBs opened unchanged from the day before though the tone remained offerish. We noted net selling pressure on 5-15y buckets, but there were also defensive bids coming in especially among local players. This set up some gains ahead of the market closing. Volume improved to IDR17.2t whilst trade concentration remained at the bellies and the tails of the curve.
CIMB Treasury & Markets Research-Fixed Income
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