Following the 50-basis point US rate cut on September 18, subsequent releases of strong economic data and limited signs of easing inflation in the US have driven yields higher across all bond markets. Notably, the unemployment rate, a key indicator for future rate cuts, improved to 4.1% (Aug: 4.2%), underscoring the resilience of the US labour market.

This has prompted a reassessment of the US rate cut trajectory, where the market now expects only one to two more rate cuts in 2024, signalling the potential for a decision to pause rate cuts to be made during the Federal Reserve’s November meeting. As such, the US Treasury (UST) yield curve shifted higher, with both 2-year and 10-year yields now exceeding the psychological level of 4%. Market sentiment remains cautious due to the impending US elections in November, which could significantly impact stimulus measures and fiscal health, thereby keeping the bond market volatile.

The Malaysian Government Securities yields tracked UST yields, leading to a muted market response to Malaysia’s positive fiscal trajectory. Corporate bond yields have also mirrored these movements, with credit spreads remaining stable. The recent depreciation of the ringgit, driven by shifting expectations surrounding US rate cuts, indicates potential foreign outflows in October, as reflected in waning foreign inflows in September. With the US elections approaching, uncertainties persist regarding portfolio flows, leading to the ringgit trading sideways in the short term.

Despite a similar increase in double-digit yields for the German Bund, market expectations indicate that another rate cut may be forthcoming during the December meeting, as the European Central Bank maintains a dovish stance amid sharp disinflation in recent months due to falling energy prices. This easing cycle is viewed positively for global economic prospects, although emerging growth risks, such as protectionist policies, remain a significant concern.

Nonetheless, domestic growth prospects for Malaysia are encouraging. Alongside the announcement of Malaysia’s Budget 2025, the Ministry of Finance upgraded its growth forecasts to 4.8%-5.3% for 2024 and 4.5%-5.5% for 2025, an increase from the previous forecast of 4.0%-5.0%. Additionally, Malaysia recorded an advance estimate of 5.3% growth for 3Q2024, following a strong performance in 1H2024 at 5.1%. Although exports experienced a slight decline in September, the positive cycle in investment and exports is expected to continue, with Malaysia positioned to benefit from occurrences of trade diversion in the region.

Inflation remains low, with headline inflation easing to 1.8% in September from 1.9% in August. Year-to-date inflation remains modest at 1.8%, below market expectations of at least 2.0%. However, inflationary pressures may rise in 2025 due to further fiscal reforms and stronger growth. The government projects inflation at 2.0%-3.5% in 2025. Nonetheless, the government’s incremental approach to subsidy reform is expected to support these fiscal changes, helping to maintain confidence in domestic economic prospects.