TA Sector Research

Weekly Strategy - 11 Dec 2023

Publish date: Mon, 11 Dec 2023, 09:36 AM

Selling Pressure to Persist Pending Outcome of Fed Meeting

The local blue-chip benchmark index drifted lower last week in the absence of positive domestic market leads, and as investors braced for the closely watched US jobs data for clues on the US inflation trend. Trading was lacklustre as investors awaited key inflation and interest rate decisions from major regional economies, while worries over weaker oil prices and China’s slowing economy due to the fragile property market dampened market tone.

For the week, the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) fell 14.41 points, or 0.99 percent to 1,441.97, with gains in Maybank (+4sen), PPB Group (+28sen) and KLK (+22sen) overshadowed by falls on Public Bank (-8sen), CelcomDigi (- 15sen), Dialog Group (-10sen), Tenaga (-11sen) and Petronas Chemicals (-14sen). Average daily traded volume last week decreased to 3.1 billion shares, compared to 3.53 billion shares the previous week, while average daily traded value dipped to RM1.93 billion, against the RM2.79 billion average the previous week.

Investment sentiment last week was battered by Moody’s downgrade of China’s credit rating, dampened by its property crisis that would weigh on the economy. Concerns about China’s economy could prevail this week and cause a continuous slide in the FBMKLCI while waiting for the US Federal Reserve (Fed) meeting. This weakness could stem from China’s November consumer price index (CPI) and producer price index (PPI) that were released last Saturday, which exhibited sustained deflationary pressure. The CPI fell 0.5% YoY versus -0.2% YoY in October while PPI saw a larger decline of 3.0% YoY versus -2.6% YoY in October. Investors need to see convincing broader stimulus from China to revive its slowing economy than the piece meal measures so far that have failed to lift domestic demand.

This is an important week as all eyes will be on the US Federal Reserve meeting tomorrow and Wednesday. In the absence of any domestic catalysts in the immediate term, the Fed’s decision has implications on the USD and movement of foreign funds in the local equity market, thus the FBMKLCI. It is crucial that the Fed’s actions do not throw the world’s largest economy into a recessionary spiral next year, when China’s economy is also sputtering with low growth.

The central bank is not expected to pull any unpleasant surprises as it is widely expected to maintain its fund target rate between 5.25% and 5.50%. As the Fed chairman has clearly said early this month that it would be premature to conclude with confidence that the central bank has achieved a sufficiently restrictive stance, or to speculate on when policy might ease, the crucial information that the market is looking forward to is its summary of economic projections. It will provide forward guidance on many aspects including interest rate movements, especially the number of rate cuts, inflation projections, GDP forecast and the unemployment rate.

The Fed’s favourite benchmark, the core personal consumption expenditure, has been on a consistent downtrend from July as it fell from 4.3% to 3.5% in October. As the November data is only due on 22 December, the headline Consumer Price Index (CPI) figure this week could offer some guidance. Consensus forecast is pointing to a continuous easing to 3.1% annual rate in November CPI versus 3.2% in October while core CPI remain steady at 4%. This gradual moderation versus a still robust labour market should signal that Fed’s aggressive policy tightening is still potent without inflicting any recessionary pressure on the economy. Recall that the November nonfarm payrolls data released last week showed it increased by a seasonally adjusted 199,000, slightly better than the 190,000 Dow Jones estimate and ahead of the unrevised October gain of 150,000, Unemployment rate also came better than expected at 3.7% versus forecast 3.9%.

While positive, the still strong labour data caused an uptick in the US treasury yield last Friday as it implied that expectations for a Fed pivot as early as first quarter next year were premature. This was reflected in the CME FedWatch Tool where the first rate cut expectations shifted to next May from March. Despite all these noises, the Fed is expected to tone down its hawkish rhetoric in this week’s meeting as the prices of durable goods in the US have fallen on a year-on-year basis for five consecutive months in October.

Source: TA Research - 11 Dec 2023

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