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  • Monthly Review: Early signs of interest rate outlook divergence
Fixed-Income Views

Monthly Review: Early signs of interest rate outlook divergence

8 May 2024

The full report can be accessed here.

View Report

Contacts

Yassier Mohammed
+603-2717 2906/ yassier@marc.com.my

Dr Ray Choy
+603-2717 1770/ raychoy@marc.com.my

Malaysia’s economy picked up by 3.9% in 1Q2024 (4Q2023: 3.0%) based on the advanced estimate, close to the official 2024 full-year gross domestic product (GDP) forecast of 4%-5%. The manufacturing sector registered a 1.9% rebound after two quarters of contraction, while growth in the construction sector accelerated to 9.8% (4Q2023: 3.5%). While the services sector grew by 4.4% (4Q2023: 4.2%), the growth rate remained below the pre-pandemic (2017-2019) average of 6.4%, indicating considerable scope for further expansion.

The upward trend in private consumption suggests an optimistic outlook, as reflected in the continued expansion of wholesale and retail trade (Feb: 3.7%, Jan: 3.2%) as well as domestic credit card purchases (Feb: 17.8%, Jan: 11.2%). However, the outlook requires a sustained rebound in tourism, which necessitates continued coordination amid higher competition from ASEAN peers. While tourist arrivals are projected to normalise in 2024, the government reported over 0.53 million Chinese tourist arrivals in 2M2024, which if annualised is 3.18 million, 36.4% below the full year projection of 5 million.

On the global front, despite a persistently healthy labour market, the US’ GDP growth slowed to 1.6% in 1Q2024 compared to market consensus of 2.5% (4Q2023: 3.4%). However, the weaker growth does not boost expectation of rate cuts as the US Consumer Price Index remained at 3.5% in March (Feb: 3.2%), exceeding the market consensus of 3.4% and confirming the lack of disinflationary progress towards 2% in 2024. The Malaysian Government Securities and US Treasury markets continued to retreat due to higher-than-expected US inflation and the likelihood of the Federal Reserve (Fed) delaying rate cuts. Local corporate bond yields increased across all categories, ending a multi-month rally, marking a potential market sentiment shift on the US interest rate outlook.

In April, the market consensus anticipated only one US rate cut in 2024 (March consensus: two cuts) amid signs of sticky inflation to delay the rate cuts. Given mixed data signals, we expect the Fed to respond with policy adjustments should the labour market weaken, indicating a possibility of rate cuts despite an elevated inflation level. Over time, the recent pushback against earlier expectations of more aggressive central bank rate cuts may reverse.

Signs of interest rate outlook divergence, such as the German bund rally in March, have surfaced due to decelerating inflation and weak growth prospects in the eurozone, contrasting with a strong US economy. While German bund yields rose in April due to the recent higher US inflation and delay in US rate cuts, eurozone inflation, in contrast, eased to 2.4% in March (Feb: 2.6%). The sustained disinflationary trend is expected to increase the rate cut prospects in the eurozone, diverging from the US interest rate outlook. The improved levels of economic activity in the eurozone are expected to not limit prospects for rate cuts given its track record of bumpy growth.

Year-to-date inflation of 1.8% compared to 1.5% in 4Q2023 points to the end of the disinflationary trend. Going forward, inflation is expected to be between 2.5% and 3.0% in 2024 (2023: 2.5%) with a gradual uptick in the near future due to spillovers from new tax measures and the execution of targeted subsidies which will be phased in throughout 2024. In view of the present level of growth and inflation, Bank Negara Malaysia will likely maintain the policy rate at 3.00% in its May meeting.

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