Inflation Glooms The Already Dampened Sentiments

Global markets consumed gloomy sentiments last week, reversing the rally seen in the previous week as inflation jitters returned to spook investors

Inflation Glooms The Already Dampened Sentiments

The S&P500 was down for the week dropping to 3,863.16 points while the Dow inched lower to reach 31,286.02 points. The Nasdaq Composite took a bigger hit shedding more than one and half point to close at 11,452.42 points.

Out of 16 indices tracked, 13 were in the red. The Hang Seng Index tanked -6.57%, China’s CSI 300 lost -4.07% while the Philippines Stock Exchange Index retreated -2.62%.

The only three advancers were Japan’s Nikkei 225, Taiwan’s TAIEX and France’s CAC40, up by +1.02%, +0.60% and +0.05% respectively.

Headline CPI inflation in the US accelerated to +9.1%yoy in Jun-22,the fastest price increase in 41 years, driven by higher prices including food, energy, housing, apparel, education, medical care and transport. The core CPI inflation was also higher than expected, although it moderated for the third straight month to +5.9%yoy, says MIDF.

US producer prices rose faster at +11.3%yoy in Jun-22, indicating that the supply side pressure and cost increase kept prices generally at elevated levels.

Exports rebounded in China with an expansion of +17.9%yoy in Jun-22, the fastest in five months as factory operations were ramped up following the easing of lockdowns. In contrast, China’s imports rose at slower pace at +1%yoy as the lingering effect of lockdown led to weak commodity imports and as domestic consumption remained subdued.

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From a corporate governance perspective, the bank continues to uphold high standards of corporate governance and sound business conduct, he says.

FBM KLCI decline

The FBM KLCI declined -0.52% last week, settling at 1,425.79 points on Friday. The Ringgit saw a weekly depreciation by circa -0.53% against the US dollar to close at USD/MYR 4.4493 while the Brent crude oil price dipped -5.63% for the week to close at USD101.16 per barrel.

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The benchmark 10-year UST yield declined -16bps to close the review week at 2.92%. Buying interest returned across the duration with larger yield drops seen at the longer end of the UST curve as investors assess the possibility of a US economic recession (within the next 24 months) engendered by rapidly rising Fed rate.

The US Fed is expected to hike by another 75bps later this month. The 10y-3y yield spread inverted deeper week-on-week from -6bps to -21ps as the short-end underperformed.

Medium-term inflation expectation ended the review week lower at 2.61% (prior week: 2.63%), its lowest weekly close since early October last year.

While the level of inflation expectation has been declining from the high of 3.73% in late March 2022, it however remains marginally elevated beyond the (hotter-than-normal) inflation range of 2.25%-2.50% acceptable (transiently) to the US Fed.

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The market may expect an increase in corporate defaults, especially for firms and sectors that have not yet fully recovered from the pandemic.

"At current juncture, it seems the market is increasingly (albeit not fully) convinced that the elevated price pressure would ebb in good time.

"In this regard, we reckon inflation expectation would methodically drop if the US Fed continued walking its talk on being sufficiently aggressive in battling against inflation," says MIDF.

MGS benchmark

The price of domestic MGS benchmark issues ended the review week higher with the 3-year and 10-year yields shed -0.2bp and -11.9bps to close at 3.48% and 4.06% respectively.

Accordingly, the 10y-3y yield spread narrowed (yield curve flattened) week-on-week from 70bps to 58bps as the short-end underperformed.

MGS foreign holdings increased on-year from RM247b in June 2021 to RM253b in June 2022.

However, it edged lower on-month from RM257b in May 2022. On Bursa Malaysia, the 12-month rolling sum of foreign net equity trade ended the review week at RM8.13b. It increased on-week from RM7.96b registered a week ago. Moreover, it improved markedly on-year from -RM12.29b a year ago.