Recent economic data for Malaysia was positive, pointing to a firm start to 2Q2024. Wholesale and 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 another month of strong growth at 7.3% in May (Apr: 9.0%), riding on higher manufacturing exports. There has been a broad-based improvement in exports from Malaysia to its major trading partners.

While domestic economic activity has been gaining momentum, headline inflation rose to 2.0% in May (Apr: 1.8%), after hovering between 1.5%–1.9% over the past eight months. This was mainly driven by higher housing and transportation costs for the month, reflecting higher costs in non-discretionary items which could 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. Overall, we maintain our full-year inflation forecast of 2.5%–3.0% in 2024.

Given signs of calmer US inflation prints over the recent months, the Malaysian Government Securities (MGS) and US Treasury (UST) markets continued to rally in June. As the 10-year UST yield dropped by a larger margin in June, the negative 10-year MGS-UST yield differential narrowed, which helped stabilise the ringgit. We expect the yield differentials to narrow further as MGS yields have stabilised, compared to UST yields that may drop on rate cut expectations.

Despite the broad bond market rally, the tightening of credit spreads in the local corporate bond market that began in early 2023 appears to have bottomed out, as the average credit spreads between MGS and corporate bonds across the term structure remained largely stable. We note potentially 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.

Notwithstanding the present market consensus anticipating up to two US rate cuts by end-2024, the market may reassess the recent optimism over the progress of US disinflation. Unlike the market, the Federal Reserve currently projects only one rate cut and higher inflation in 2024. Further US rate cuts remain likely should the labour market weaken significantly as the unemployment rate has risen. These recent developments align with our 2024 mid-year outlook titled “Stable Global Growth in a Moderate Easing Cycle”.