Summary

• Recent economic data for Malaysia has been positive, pointing to a firm start for the economy in 2Q2024. Wholesale & retail trade was resilient, with growth accelerating to 7.5% in April (1Q2024: 2.3%), consistent with the higher domestic-oriented production growth for the month. On the external sector, Malaysia’s exports posted strong growth of 7.3% in May (Apr: 9.0%), riding on higher manufacturing exports.
• The Malaysian Government Securities (MGS) and US Treasury (UST) markets continued to rally in June following signs of calmer US inflation prints. Yield curves shifted lower across most bond markets, with a significant rally in the European bond market due to the European Central Bank’s (ECB) recent interest rate cut in June. We expect yield differentials to narrow further as current MGS yields have stabilised, while the UST yields may drop on rate cut expectations.
• The tightening of credit spreads that began in early 2023 appears to have bottomed out, as the average credit spread between MGS and corporate bonds across the term structure remained largely stable. We note a potential for higher-than-projected government bond issuances in 2024, driven by front-loaded supply in 1H2024 and lower revenue collection for 4M2024 based on preliminary tax data.
• Headline inflation rose to 2.0% in May (Apr: 1.8%), after hovering between 1.5%–1.9% over the past eight months. The higher costs in non-discretionary items may tame discretionary spending. Looking ahead, we expect inflationary pressure to increase in 2H2024, with anticipated pass-through of costs resulting from the ongoing subsidy rationalisation.