The latest economic data for Malaysia was mixed but within expectations. Retail trade was resilient, with growth rebounding to a four-month high of 2.4% (Sep: -0.4%), consistent with the higher domestic-oriented production growth for the month. On the external sector, notwithstanding the subdued November exports data of -5.9% (Oct: -4.4%), petroleum and rubber products rebounded after consecutive months of double-digit decline. Going forward, we envisage a brighter outlook for the manufacturing sector amid some tentative signs of strengthening demand coupled with the anticipated recovery in the global semiconductor industry.
On the commodity front, the Brent oil price experienced volatility in December amid oversupply concerns and tensions in the Red Sea. We foresee any escalation in the Red Sea tensions, the conflicts in the Middle East, future OPEC output decisions, and evolving global growth expectations to have repercussions on the worldwide supply chain and commodity prices in 2024.
The Malaysian Government Securities (MGS) market reacted to a more dovish Federal Reserve (Fed) December meeting. In the US, the consistently favourable data on cooling inflation motivated higher rate cuts bets. While the Fed’s inflation projection for 2024 has been lowered, the unchanged unemployment projection for 2024 could imply growing confidence in meeting the inflation target without significant job losses. The ongoing disinflationary trend in advanced economies has sustained the market rally from November’s upswing in equity and bond indices. Additionally, the negative spread between the 10-year MGS and US Treasury yields has narrowed, which would further support improvement in foreign flows into the local market and appreciation of the ringgit.
Headline inflation eased to a 33-month low of 1.5% in November (Oct: 1.8%), driven by further moderation in food prices. In the upcoming months, upside risks to inflation could stem from rising commodity prices, higher food prices from geopolitical tensions–induced supply chain disruptions, and pressures from a firmer domestic demand. With the year-to-date inflation averaging 2.5%, the full-year 2023 inflation is estimated to fall within the Ministry of Finance’s projected range of 2.5%-3.0%. Given the easing inflation trend, prospects of a stronger ringgit, and anticipated Fed rate cuts that will support the interest rate differential in 2024, we expect BNM to hold the Overnight Policy Rate unchanged at 3.00% in its next Monetary Policy Committee meeting on January 24, 2024.