Treasury Pulse – Forex, US Treasuries, Malaysian Bonds, Markets,
Global Forex Market
Volatility in global markets has been sucked in, leaving major currencies in a limited range as investors stepped aside ahead of Thursday’s development – May US CPI print and Central Bank monetary meeting European Union (ECB). Post-event risk seemed to add new direction to the currency market. Investors saw the U.S. inflation rate skyrocket to a 13-year high of 5% yoy (yoy) from 4.2% yoy in April beating the consensus of 4.7% on the dollar market. At the same time, US core inflation also jumped 3.8% yoy from 3.0% yoy in April (consensus 3.4%), marking the fastest reading since 1992.
As inflation peaked over several years, investors quickly realized that most of the increase was due to base effects. In addition, the breakdown showed that the surge in used car prices skewed the reading of inflation. With the headline inflation figure out of balance, investors lowered expectations of the Fed’s cutback plans earlier than expected – leaving the dollar weaker by the end of the week, down 0.07% to 90, 08. During the week, the dollar traded between 89.95 and 90.12.
Separately, Democrats on Wednesday began preparing an infrastructure bill for a vote in the House, with or without Republicans’ backing.
President Biden will discuss the possibilities of a deal with Republican leaders again this week after rejecting the GOP’s latest bill offer on Friday for a spending package of $ 928 billion (RM 3,800 billion).
The euro remained stable, up 0.02% to 1.22 as the ECB pushed back expectations of a slowdown in the emergency bond buying program. Nonetheless, as widely expected, the ECB kept interest rates unchanged at -0.50% and reaffirmed that it would continue to make net asset purchases under the emergency purchase program in pandemic case (PEPP) with a total envelope of 1.85 trillion euros (9.2 trillion RM) at least until the end of March 2022.
In the meantime, the ECB had also become a little more optimistic about the outlook, which was illustrated by higher growth and inflation forecasts for this year and next, as well as the claim that the risks to the growth outlook were now roughly balanced. However, the inflation forecast for 2023 remains weak and the ECB remains of the view that the higher inflation figures remain transitory.
The pound strengthened 0.14% to 1.42, taking inspiration from the weakness of the dollar. Investors nonetheless became slightly cautious on the cable trade over the week amid lingering concerns over a potential delay in UK reopening plans as well as growing uncertainties over how the market will move. Brexit.
The yen appreciated 0.17% to 109.3 benefiting from lower US Treasury yields. Although Japan’s year-on-year PPI recorded its highest level since September 2008 at 4.9% in May from the revised 3.8% in April, it is both the leading economic index and coincident with jumped higher to 103.0 and 95.5, respectively than the previous month to 102.4 and 95.5 suggesting the recovery in the economy as the number of new daily cases of covid-19 declined significantly in mid-May .
The majority of Asian currencies excluding Japan strengthened against the dollar, but recorded only modest gains. The rupee led the way, up 0.33% to 14,248, followed by the South Korean won, up 0.09% to 1,115, and the Taiwan dollar, up 0.08% to 27 , 69. Meanwhile, the rupee entered underperformance, weakening 0.08% to 73.1 on the rise in crude oil prices.
The ringgit saw firmer bids during the week, rising 0.17% to 4.12 while briefly touching a one-month high of 4.117 amid the weakening of the greenback and the price of the dollar. higher crude oil which hit a two-year high. The local unemployment rate fell to 4.6% in April from 4.7% in March, supported by the increase in the number of employed people to 15.35 million from 15.33 million. At the same time, industrial production and retail sales hit a record high of 50.1% yoy and 55.4% yoy, respectively in April, due to weak base effects.
U.S. Treasury Bill (UST) Market
The US Treasury curve flattened with the front-to-stomach portion of the curve relaxed 1 to 8 basis points while the rear portion fell 12 to 13 basis points. The widely watched 10-year note fell 13.7 basis points to 1.432%, marking its lowest since March 2, as the spread between the 10-year US and the 2-year UST narrowed at 129 basis points.
Contrary to conventional market expectations, the bond market purchases came after the higher US CPI figure was released in May. This is to say that the devil is in the detail. The breakdown showed that soaring used car prices skewed the reading of inflation. Prices for used cars and trucks jumped more than 7% month-on-month (29.7% year-on-year), accounting for a third of the total increase for the month. And the jump can easily be explained by the base effects and the ongoing semiconductor shortages that sparked the demand for used cars.
Therefore, the data will remain noisy for the next few months until the normalization of economic activity takes further root. In other words, “transient” inflation remains high and the Fed’s patient stance is unlikely to change in the near term. Friday midday, the benchmark UST yields at 2, 5, 10 and 30 years were 0.15%, 0.71%, 1.43% and 2.12% respectively.
Malaysian bond market
In the middle of a short work week, the AMS curve steepened, following declining global yields and slowing domestic cases of Covid-19.
The AMS front of the ventral portion of the curve relaxed from 2.5 basis points to 5.5 basis points while the rear portion remained broadly unchanged. Nonetheless, a reopening auction of the benchmark 10-year MGS stock closed with a decent BTC of 1.966x and an average yield of 3.313%.
At noon on Friday, the benchmark 3, 5, 7, 10, 15, 20 and 30 year AMS returns stood at 2.24%, 2.50%, 2.97%, 3.24%, 3 , 87%, 4.15% and 4.30%, respectively.
Ringgit Interest Rate Swap Market (IRS)
The IRS curve fell 1-4 basis points across the curve while the three-month Klibor stood at 1.94%. Elsewhere, the 5-year CDS lost 1.8% wow to 43.36 bps.
Malaysian equity market
During the week (June 4-10), the KLCI FBM lost 10.67 points or 0.67% to 1,579.90 points, following the downtrend of the Dow Jones Industrial Average (-0.32%) and the MSCI Emerging Markets index (-0.34%). Globally, investors reacted moderately to a stronger-than-expected US Consumer Price Index (CPI) in May 2021 (compared to a market decline on a similar trend a month ago), as they continued to support the Fed’s belief that a surge in inflation would be transitory.
Investors were also reassured by a subdued report on US employment in May 2021 that supported the Fed’s accommodative policy. Locally, investors became cautious as political leaders on both sides of the aisle secured separate audiences from Yang di-Pertuan Agong to Istana Negara.
Foreign investors offloaded RM284.2 million of Malaysian stocks during the week, pushing the year-to-date net outflows to RM3.3 billion. Local institutional and retail investors continued to dominate the market with an attendance rate of 45.5% and 39.2% in June respectively (comparable to 42.4% and 38.1% in May respectively). Foreign investors remained passive with a participation rate of 15.3% in June (against 19.5% in May).
Meanwhile, foreign investors invested in Malaysia Government Securities (MGS) for the 13th consecutive month with a net inflow of RM 2.4 billion in May 2021 (up from RM 4.7 billion in April 2021).
Equity trading activity declined with an average daily traded value (ADVT) of RM 3.8 billion in June (down from RM 3.9 billion in May). Likewise, the velocity of turnover fell to 52.1% in June (vs. 54.2% in May).
During the week, five of Bursa Malaysia’s 13 sectors finished in positive territory. The best performing sector was Transport and Logistics (+ 6.8%) driven by a sharp rise in the share price of a port operator as part of a privatization transaction. The worst performing sector was tech (-3.0%) as investors were concerned about tight operations and supply chain disruptions amid a new foreclosure.
Over the coming week, investors will be watching closely:> US retail sales (May) on June 15;
> Chinese industrial production (May) on June 15;
> Decision on US interest rates on June 16;
> Euro CPI (May) on June 17;
> Decision on interest rates in Japan