The latest retail and exports data suggest a slower domestic economy in the second quarter of 2023 is imminent given the anticipated slowdown in the global economy. Notably, the second straight month of moderation in the seasonally adjusted volume index of wholesale & retail trade (April: 4.7%, Mar: 9.4%) along with interest rate tightening and normalisation of supply chains potentially indicate the end of the post-pandemic consumer spending surge.
On the bond market, while Malaysian Government Securities (MGS) command positive yield differentials with US Treasuries (UST), the spread has narrowed significantly to 11 bps on June 26 compared to the average spread of 108 bps in 2022. Nevertheless, the narrowing yield spread of corporate credit bonds and positive foreign flows of RM17.8 billion (Jan-May) in local government securities since the beginning of the year reflect the resilience of Malaysia’s bond market in June.
Given a slate of economic data supporting hawkish views, rate tightening in the advanced economies will likely result in a rise in the UST and bund yields. The continuing divergence of interest rate policy between Malaysia and the advanced economies could exert some pressure on the local bond market in the near term, stemming from the risk of a reversal in the positive foreign flows amid yield chasing activities among investors.
Furthermore, the ringgit along with other regional currencies have been performing poorly, facing challenges against the US dollar due to tighter US monetary conditions and a weaker external environment. The anticipated more aggressive tone on rate tightening in the advanced economies could heighten global recession risk concerns and lead to continued safe haven flows among investors.
On the domestic front, consumer spending should remain relatively resilient to provide a buffer to steady gross domestic product (GDP) growth momentum going forward. Hence, we are maintaining our 2023 GDP growth forecast at 4.2% for Malaysia. Inflation in 2023 is expected to soften to 2.8%. Overall, the narrative of rising global risk factors together with the easing inflation trend should provide Bank Negara Malaysia (BNM) the scope to keep the overnight policy rate unchanged at 3.00% in the near term. Investors will closely monitor several key monetary policy meetings to be held in July including those by the US Federal Reserve, the European Central Bank and BNM for further hints on their interest rate outlook going forward.