Malaysian Inflation Isn't Misbehaving, Says BNM Assistant Governor

Central Bank

Summary:

Malaysia's inflation currently isn't misbehaving, giving the central bank room to keep up its "conditional pause", according to a senior official.

"If it's food prices and all the supply shocks, we have a history of seeing through those shocks," Bank Negara Malaysia (BNM) assistant governor Fraziali Ismail said in an interview with Bloomberg Television's Haslinda Amin on Thursday (June 8). "What matters is how it stokes demand. At this juncture, again, we don't see inflation misbehaving in Malaysia."

When asked if there is a case to continue hiking rates, Fraziali said "that depends on how inflation behaves". Fraziali, who's worked at the central bank for almost three decades, reiterated the central bank's 2023 average inflation forecast of between 2.8% and 3.8% in the interview in Kuala Lumpur.

"What we have seen so far, as I've mentioned earlier, inflation is a function of both supply and demand," Fraziali said. "We have seen, for example, demand-driven inflation staying quite strong at this juncture. We don't have an inflation problem."

Easing inflation will give BNM the scope to ease monetary policy should the economy lose momentum. Consumer prices rose 3.3% in April from a year earlier, the slowest pace in 11 months.

While inflation has mostly moderated, boosting market bets that borrowing costs in the region have peaked, price growth is still proving persistent in some places. Canada delivered a surprise interest-rate hike on Wednesday, and earlier this week Australia unexpectedly increased its key rate for a second straight meeting and kept the door open for more hikes.

Malaysia's central bank has delivered five rate increases in the past year, with a surprise hike early last month bringing borrowing costs back to pre-pandemic levels. Policymakers warned then that inflation may flare up again, with commodity prices and an adjustment to subsidies among the factors to watch.

"Many central banks have taken the step, us included, to have an intermittent pause, to reevaluate what has been the effects of our measures on the economy," said Fraziali, who also sits on BNM's Monetary Policy Committee. "In a way, when we do a conditional pause, let me stress it is a conditional pause — it depends on incoming data as well."

A policy pause in Malaysia will offer the economy some relief, as analysts predict that the pace of expansion will slow to 4.2% this year, from 8.7% in 2022. Traders think the rate-hike cycle has ended, with ringgit one-year, one-day swaps reflecting bets that BNM will stand pat over the next 12 months.

Still, an impending reduction in subsidies may rekindle price pressures, and Fraziali noted that inflation depends on subsidy timing. Moody's Investors Service has warned that a heatwave could translate into faster food inflation and another interest-rate hike.

Source: Bloomberg

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Warren Takunda

Traders' Opinions

In the face of impending inflation data and the highly anticipated Federal Reserve decision next week, the US dollar index (DXY) demonstrated resilience, maintaining a stable position around 104. Market sentiment remains cautious as investors carefully assess the potential impact of consumer inflation figures for May, projected to reflect a 0.3% price increase. The outcome of this data release could significantly influence the Fed's decision-making process. Additionally, market participants are closely monitoring the unwinding of long dollar bets, which were initially taken as a hedge before the US government raised the debt ceiling. Let's explore the factors shaping the currency market and the implications for investors.

Fed's Monetary Policy

The Federal Reserve is widely expected to keep interest rates unchanged this month. However, market speculations indicate a growing probability of a rate hike in July. Investors will be scrutinizing the Fed's decision closely, seeking insights into the central bank's stance on inflation and its potential monetary tightening measures. A cautious approach by the Fed could bolster the dollar's position in the short term, as investors seek stability amid uncertain market conditions.

Inflation Concerns

The release of May's consumer inflation data holds considerable significance, as it will play a crucial role in shaping the Fed's decision-making process. With projections pointing towards a 0.3% increase in prices, any deviation from these expectations could trigger market volatility. A higher-than-anticipated inflation reading may raise concerns about the Fed's transitory inflation narrative, potentially prompting a more hawkish response from the central bank. Such a development might strengthen the case for an earlier interest rate hike and potentially lend support to the US dollar.

US Treasury Issuance and Potential Demand Concerns

Investor attention is also focused on the US Treasury's increased issuance of Treasury bills, which aims to rebuild the government's cash balance. Any potential demand problems arising from this strategy could have repercussions in the market. If there is insufficient demand for the increased issuance, it could create headwinds for the US dollar, possibly leading to a depreciation. Therefore, market participants will closely monitor the Treasury's actions and assess their impact on overall market sentiment.

Trade Deficit and International Factors

Recent data revealed a widening US trade deficit in April, driven by increased imports and decreased exports. Furthermore, the recent rate hikes by the Bank of Canada and the Reserve Bank of Australia have attracted investors away from the dollar. These international developments, along with the evolving global economic landscape, contribute to the overall sentiment towards the US dollar. As global central banks adjust their policies, investors reassess their positions, resulting in potential shifts in capital flows that may impact the dollar's strength.

The US dollar index (DXY) has maintained stability around the 104 level, reflecting cautious sentiment among investors ahead of crucial events in the coming weeks. The release of May's inflation data and the Federal Reserve's decision will likely determine the short-term trajectory of the dollar. With markets pricing in the potential for a rate hike in July, any surprises in the inflation figures could have significant implications for the Fed's monetary policy. Moreover, investors will continue to monitor the US Treasury's issuance of Treasury bills, ensuring that demand remains adequate. As international factors, including rate hikes by other central banks, shape the currency market, investors must remain vigilant to potential shifts in capital flows.

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Cohen

Bond

Global bonds are slumping after two shock interest-rate hikes this week served traders a reality check that central banks are far from done fighting inflation.

Shorter-maturity Treasury yields are close to their highest since March, while their Australian equivalents have jumped to levels last seen more than a decade ago. Investors are back ditching sovereign debt after the Bank of Canada joined the Reserve Bank of Australia in surprising markets with more rate hikes to combat stubbornly fast consumer-price gains.

The tightening is convincing traders to rethink their bets of US rate cuts later this year, underscoring the threat that the battle against inflation may be far from over.

Fresh jitters over a prolonged rate hike cycle risk paving the way for a renewed surge in volatility across global risk assets. But just like during last year's hikes, the concerns also put traditional havens in the firing line — a gauge of US Treasuries fell more than 1% in May as funds repositioned.

"The Reserve Bank of Australia defied economist predictions to increase the cash rate again this week, which may put more pressure on the European Central Bank, US Federal Reserve (Fed), Bank of Japan and Bank of England," said Colin Graham, the head of multi-asset strategies at Robeco. "Expectations for July have now shifted from an expected cut to an expected rise" for the Fed, he said.

Treasury yields were little changed in Asia on Thursday (June 8), with the 10-year just below 3.8%, up about 10 basis points this week. Australia's three-year yield jumped as much as 17 basis points to 3.87%, the highest since 2011.

More hikes

Investors briefly priced in a full quarter-point rate hike by the Fed by July and though they still expect some easing by year end, multiple rate cuts have being priced out of markets. That's triggered a renewed flattening of sections of the US yield curve.

All eyes will be on US inflation data next week, which will provide further clues on the Fed's policy path.

"With inflation having proved more stubborn than we'd thought, we now think the central bank will keep its policy rate higher for longer than we had previously projected," Diana Iovanel, an economist at Capital Economics, wrote in a note.

While some firms including Societe Generale SA reckon US interest rates may already be at their peak, the same can't be said for those in Europe. Traders are pricing in half a percentage point of hikes by the European Central Bank in the next three months, swaps data show.

The ECB is "behind the curve in terms of inflation pressure, in terms of rates", Guy Stear, the head of fixed income research at SocGen told Bloomberg Television. "They have to keep going."

Source: Bloomberg

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Warren Takunda

Traders' Opinions

In a report released today, the United States Department of Commerce revealed that the nation's trade deficit reached a six-month high of $74.6 billion in April 2023. While the widening gap indicates challenges for the US economy, it managed to fall slightly below market expectations, which had projected a shortfall of $75.2 billion. The latest data reveals a complex mix of declining exports and rising imports, influenced by various industries and key trading partners.

Exports from the United States experienced a notable decline of 3.6% to reach $249 billion in April. Among the leading export categories that contributed to this contraction were crude oil, fuel oil, pharmaceutical preparations, gem diamonds, jewelry, financial services, and government goods and services. On the positive side, sales in the travel industry witnessed a rise during this period.

Meanwhile, imports into the United States increased by 1.5%, reaching $323.6 billion in April. The surge in imports was primarily driven by passenger cars, industrial supplies and materials, finished metal shapes, nonmonetary gold, organic chemicals, cell phones, and other household goods. However, there was a decline in purchases of crude oil, natural gas, as well as transport and travel services.

Analyzing the trade imbalances, it becomes evident that the largest deficits were recorded with China, amounting to $24.2 billion, followed by the European Union with a deficit of $17.3 billion. Mexico and Vietnam also contributed significantly to the trade gap, with deficits of $13 billion and $8.5 billion, respectively. On the other hand, the United States managed to achieve trade surpluses with the Netherlands ($4.2 billion), South and Central America ($4.1 billion), Belgium ($1.9 billion), and Hong Kong ($1.6 billion).

The widening trade deficit in April raises concerns about the impact on the overall US economy. A persistent trade gap could put pressure on domestic industries, potentially leading to job losses and affecting economic growth. Efforts to address the imbalance in trade, such as exploring new export markets and reviewing trade policies, may be crucial in the coming months.

Economists and market analysts will closely monitor future trade data, looking for signs of stabilization or further widening of the gap. The United States continues to navigate a complex global trade landscape, marked by evolving geopolitical dynamics and economic uncertainties.

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Owen Li

Commodity

LME three-month nickel sank to a nine-month low of $20,310 per tonne last week and at a current $21,500 is now down by 31% since the start of the year.

Nickel is pricing in a looming supply glut as Indonesia builds out ever more production capacity in its race to be an electric vehicle battery metals giant.

The country's mined output grew by 48% last year and by another 41% in the first three months of this year, according to The International Nickel Study Group.

Indeed, such is the scale of the Indonesian nickel boom that the market could be in large surplus until at least 2027, Macquarie Bank analyst Jim Lennon told an industry conference in Jakarta last week.

You wouldn't know it from LME stocks, which are at their lowest since 2007 with metal still departing daily.

The supply surge hasn't yet crossed nickel's class divide and low visible inventory is still cushioning the price fall.

Low Exchange Stocks, Divergent Spreads

Another 144 tonnes of nickel were loaded out of the LME warehouse system on Tuesday, their place in the exit line taken by 132 tonnes of fresh cancellations.

LME stocks have fallen by 32% since the start of this year and currently sit at a 16-year low of 37,386 tonnes. On-warrant inventory of 34,746 tonnes is the lowest it's been since November 2019.

Shanghai Futures Exchange (SHFE) stocks dwindled to just 560 tonnes earlier this month before getting a 3,678-tonne mini-booster last week. Shanghai time-spreads have been persistently tight due to chronically low stocks and the cash premium seems finally to be drawing in metal.

London time-spreads, by contrast, are trading in super-contango territory. The benchmark cash-to-three-months period flexed out to a contango of $210 per tonne in late May and was still a wide $122 at Tuesday's close.

The spread structure complements the outright price weakness in signalling growing oversupply.

Low exchange inventory, however, signals that the surplus is still largely confined to the Class II segment of the market and hasn't yet crossed over to the high-purity Class I nickel that trades on both the LME and ShFE.

Closing The Class Divide

The INSG last month raised its expected global supply-demand surplus to 239,000 tonnes. But it noted that while market surpluses have in the past been linked to LME-deliverable Class I nickel, this year's abundance will be in Class II intermediate product and chemical forms.

Russian nickel producer Norilsk Nickel has also just raised its assessment of 2023 market surplus from 110,000 tonnes to over 200,000 tonnes in light of the pace of Indonesian production growth. It too expects most of the surplus to come in Class II form.

Nickel's class divide is expected to close as a new generation of Indonesian operators master the processing route of converting the country's relatively low-grade ore to battery-ready nickel sulphate.

Upgrading Indonesian supply to battery-quality form should reduce demand for Class I nickel, previously the material of choice for conversion to nickel sulphate.

There are signs of this already happening.

China, which is heavily invested in Indonesia's nickel sector, has been importing ever rising quantities of intermediate products such as nickel matte and pig iron.

The country's call on Class I refined metal has been falling in tandem. Net refined metal imports slumped from 256,000 tonnes in 2021 to 133,000 tonnes last year. Inbound shipments in the first four months of 2023 amounted to just 11,000 tonnes, down 82% on the same period of 2022.

The displacement effect should help loosen a tight Class I market outside of China.

Norilsk expects the Indonesian displacement effect to generate a 40,000-tonne supply surplus in the Western market over the course of the year.

Waiting For Surplus

The Class I physical supply chain is easing. Nickel briquettes in Rotterdam are currently commanding a premium over LME cash in the range of $375-600 per tonne, according to Fastmarkets.

That's a long way off last year's extreme highs of over $2,000 per tonne when the market was panicking about the potential for official sanctions on Norilsk, a major supplier of Class I nickel.

However, the European premium is still elevated by historical standards. Prior to February 2022 and the Russian invasion of Ukraine it had been trading for many months just below $200 per tonne.

Russian nickel has been hit with penal import tariffs by the United States but remains free of government sanctions. Self-sanctioning by buyers opting for other brand metal clouds the picture but the flow of Russian metal, even if down changed channels, has been an important supply stabiliser in Western markets.

Yet it is evident that refined metal is still sufficiently scarce that material is still tightly held. The last inflows to the LME warehouse network were almost a month ago.

More arrivals would vindicate the many bears in the market. Until then, though, low and falling inventory remains a point of tension within a market pricing itself for massive surplus.

Source: Reuters

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Thomas

Central Bank

South Korea's central bank warned on Thursday (June 8) that an early shift in its monetary policy stance could pile more pressure on the local currency, a risk that needs to be properly addressed.

Highly uncertain inflation, accumulated financial imbalance, and credit risks related to the real estate market are among issues that required to be considered before changes to the monetary policy, the central bank said.

"Additional rate hikes by the US Federal Reserve (Fed) or an early shift in the domestic policy stance may increase downward pressure on the local currency," the Bank of Korea (BOK) said in its quarterly monetary policy report submitted to Parliament.

The BOK held interest rates steady for a third straight meeting last month, after 300-basis-point increases in 1-1/2 years through January, but also signalled it may not be done tightening.

The current policy interest rate of 3.50%, the highest since late 2008, is at a restrictive level, slightly above the neutral range, the BOK said.

However, the central bank said the degree of restrictiveness has lessened significantly this year with a sharp fall of interest rates in local financial markets.

Volatility in the won has risen above its long-term average since early last year following the Fed's interest rate hikes and exceeded that of most other currencies since August by a significant degree, the report said.

Domestic factors such as trade deficits have recently fuelled the increased volatility, it said.

The won has weakened by 3% against the U.S. dollar so far this year, following a 6% drop in 2022, when the South Korean currency once touched its lowest level in 14 years. That compares with the U.S. Dollar index's gains of 0.4% and 8.2% so far this year and in 2022 respectively.

The BOK said uncertainty was still high over how fast inflation would ease, citing core prices that were stickier in downward direction and delayed public utility price hikes.

The real estate market remains overvalued, the central bank said, adding that a declining trend in house prices softened this year, with a rebound in mortgage loans on loosened regulations.

Source: The Edge Malaysia

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Warren Takunda

Traders' Opinions

Economic

The Turkish lira plummeted over 6% against the US dollar on June 7th, reaching a new record low of 23 lira per dollar. This marked the largest daily drop since 2021 and brought the total depreciation to more than 16% since the runoff election held on May 28th. Reports have emerged suggesting that state lenders have halted the sale of dollars, signaling a change in Turkey's market interventions aimed at curbing the demand for foreign exchange. This move comes as the country's net forex reserves slipped into negative territory for the first time since 2022.

Investors and analysts alike have attributed this sharp decline to the new economic team's decision to pull back from intervening in the currency market. Led by Mehmet Simsek, a former deputy prime minister renowned for his market-friendly policies, this team is expected to implement a more conventional economic approach. Simsek's appointment as the new finance minister has fueled investor optimism, with many betting on a return to orthodox monetary policies and a market-driven exchange rate.

Furthermore, market participants are anxiously awaiting the nomination of a new central bank governor, which will further shape Turkey's economic direction. This appointment is expected to shed light on the future monetary policy stance and the extent of the government's commitment to restoring stability to the Turkish lira.

In addition to domestic factors, the decline of the lira has been influenced by Japanese retail investors who may have triggered stop-loss orders in both the lira and yen markets. Their actions have contributed to the lira's downward spiral, adding to the existing pressure on the currency.

The recent sharp devaluation of the Turkish lira underscores the urgency for the new economic team to address the country's economic challenges. Inflationary pressures, a widening current account deficit, and geopolitical uncertainties have been weighing on Turkey's currency in recent months. Investors will be closely monitoring the steps taken by the government to stabilize the lira and restore confidence in the Turkish economy.

As the situation unfolds, market participants will be keeping a close eye on the Turkish authorities' approach to managing the currency and the broader economic reforms that are expected to follow. The decisions made by the new economic team and the central bank will likely shape Turkey's economic trajectory in the coming months.

To stay updated on all economic events of today, please check out our Economic calendar

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