Econ Watch - Foreign holdings of US government bonds rise to a record high in December
- International investors increased holdings of US government bonds by USD78.0bil (or +1.4% MoM), which pushed foreign holdings to a record level of USD5.79tril in December.

- Foreign holdings of US government bonds mainly came from Belgium (+28.0% MoM), UK (+13.0%), Hong Kong (+12.1%), Norway (+18.1%), South Korea (+16.2%), Denmark (+15.1%) and Netherlands (+23.4%).

- Meanwhile, China reduced holdings of US Treasury debt in December by the most in two years as the Federal Reserve announced plans to slow asset purchases.

- China’s holdings of US government bonds fell by USD47.8bil (or -3.6% MoM) to USD1.27tril in December. Nevertheless, China’s holdings have increased by 4.0% YoY in 2013.

-  In terms of forex reserves, note that China has accumulated a world record of USD3.82tril (or +15.4% YTD) in December. Despite that, the CNY currency had strengthened by 2.8% against the USD in 2013.

-  Capital inflows and the central bank’s intervention to limit gains of the CNY currency have contributed to China’s currency constituting one-third of global forex reserves holdings.

-  Also, Japan’s holdings of US government bonds slipped by USD3.9bil (or -0.3% MoM) to USD1.18tril. In 2013, Japan’s holdings grew by 6.4% YoY. Note that Japan is the second largest foreign lender to the US.

-  As for Malaysia, US treasury holdings in December were unchanged from November. However, it fell by 38.9% YoY (or -USD7.5bil) to USD11.8bil at end-2013.

-  Elsewhere, overall reserves at BNM declined by 1.3% MoM (or -USD1.9bil) to USD133.1bil as at 30 Jan 2014. BNM will release the international reserves for Malaysia as at mid-Feb on 21 Feb 2014.

-  During the 1H of February, Malaysia’s international reserves had probably depleted by another USD2.0bil from end- Jan as BNM sold USD and bought the Ringgit to limit the depreciation of the local currency.

-  In the US, the Fed trimmed its USD85bil monthly bond buying by USD10bil in January and again in February. That pace of QE tapering will continue until the central bank ends the program at end-2014.

Economic Update - Upside risks to inflation persist
Headline inflation extended its upward trajectory for the fifth straight month, hitting 3.4% yoy in Jan due to the follow-through impact of administered price adjustments. Core inflation also crept up as second-round effects bit. We expect CPI to hover around 3.4-3.8% in Feb-Aug before easing to 2.5-3.0% in Sep-Dec. The impact of price reductions for 4,000 items will depend on their weights in the CPI basket. We think BNM will not react prematurely after the monetary policy committee (MPC) meeting on 6 Mar as we expect it to continue to weigh the risks between growth and inflation.
Inflation started the year on a high note...
Headline inflation started the year on a high note as CPI increased 3.4% yoy in Jan (+3.2% in Dec 2013), lifted by the chain effects of administered price adjustments. The reading matched our estimate but a tad higher than market expectations of 3.3% gain. Demand price pressures, as measured by core inflation, marched higher to 2.2% from 1.9% in Dec 2013. This indicates that domestic cost factors have yet to dissipate and the uptrend is likely to persist until Aug, provided there are no further subsidy cuts as analysed in our 4 Feb 2014 Macro Pulse - Will BNM react to second-round effects?

... as the chain effects continue
A breakdown of CPI data showed that food prices remain elevated (+4.2% vs. +4.5% in Dec), partly due to spending related to Chinese New Year. The weakening ringgit added to the price pressures amid the imposition of price-controlled items in 26 Jan-9 Feb. Housing, utilities and other fuel prices rose 3.2% (+2.4% in Dec), reflecting the impact of the 10.6% electricity tariff hike on 1 Jan for the consumer sector. Transport costs also picked up 5.3% (+5% in Dec) after a 5sen price hike for RON97 petrol to RM2.80/litre on 8 Jan. The decision not to raise toll rates this year should help moderate transport price inflation. Prices paid in restaurants and hotels rose 4.2% (+3.3% in Dec), reflecting the cascading effects of previous price hikes and festive demand.

No change for policy rate on 6 Mar
We expect BNM to opt to keep the overnight policy rate (OPR) at 3.00% after the MPC meeting on 6 Mar. It will tolerate a brief period of negative real interest rates. We expect any change in monetary policy stance to materialise in 2H14 if domestic conditions permit, raising the OPR by 25bp. Our OPR target for end-2014 remains 3.00-3.25%.

Sunway Real Estate Investment Trust (SREIT MK; RM1.30) – BUY
 R2: 1.43
 R1: 1.33
 S1: 1.23
 S2: 1.17

 The stock appears to be forming a
triple bottom formation at its
support level of RM1.23. Taking
out the ST resistance trend line
should send prices higher in the
coming days if not weeks.

 Both MACD and RSI sport a
bullish divergence signal. The RSI
has hooked upward after finding
support at 40-50pts range.

 Aggressive traders may start to
nibble now with a stop placed
below RM1.23. Once the
resistance trend line is taken out
(now at RM1.30), we expect prices
to retest RM1.33 and RM1.43
next.