Domestic consumption remained resilient, while the softer decline in exports together with better-than-expected economic performance and stable industrial production growth in China may indicate a potential rebound in Malaysia’s manufacturing sector. The escalating geopolitical conflicts in the Middle East have led to higher oil prices, reignited concerns about inflation, and heightened overall economic uncertainties.

Despite a temporary pause in the dollar index’s rally against major currencies, the ringgit continued its weakening trend in October. Volatility in Asian currencies, especially the ringgit, may persist amid the recent safe-haven flow favouring the dollar. The local bond market adopted a quieter and cautious stance as foreign investors closely tracked the depreciating ringgit movement in the absence of domestic catalysts.

The local bond market reacted strongly to rising US Treasury (UST) yields fuelled by a hawkish outlook from the Federal Reserve (the Fed) officials’ commentaries and mounting fiscal concerns. Rising geopolitical tensions could either lead to higher yields should it result in inflation concerns or lower yields due to safe-haven flows, resulting in a volatile market. The persistent upward momentum is likely to continue due to the possibility of a rate hike, rising supply of US bonds and mounting inflationary concerns which will exert more pressure on the ringgit and domestic bond market.

As further assessment is needed amid mixed economic signals, the Fed is likely to keep rates steady in its November meeting to curb persistent inflation, despite potential growth slowdown. Nonetheless, the Fed will likely maintain its hawkish rhetoric. Upcoming economic data will provide insights into how economic growth is evolving amid tight monetary conditions.

We maintain our 2023 inflation forecast at 2.8% by the end of the year but note renewed upside to inflation on food prices and a weaker ringgit. In view of this, Bank Negara Malaysia is likely to maintain the overnight policy rate at 3.00% for the rest of the year. Overall, tighter monetary conditions and a challenging external environment could constrain domestic growth ahead. For now, 2023 GDP growth is in line with the Ministry of Finance’s estimation of 4.0% (2022: 8.7%), based on potential support from oil prices, upside risk to exports, elevated consumer spending, and recovering tourism.