Malaysia’s industrial production may have risen 2.3% in September

We expect industrial production to have risen 2.3% y/y, following the higher than expected 3% y/y print in August. The IP performance profile should mirror that of the export sector, where commodities have offset the poorer performance of the electronics sector. Within manufacturing, sectors linked to commodities, such as petroleum and rubber, should continue to do well. Indeed, these sectors contributed to about 90% of manufacturing-sector growth in August.

Meanwhile, oil production appears to have improved after a poor H1, expanding m/m since June. Further expansion on this front should support another positive m/m print in the mining sector.

On balance, IP appears to be softening owing to external market weakness, but support from commodity-linked sectors is limiting the downside for now.

We close out of our short MYR 2Y/5Y/10Y butterfly trade for a loss of 14bps (entry at minus 11bps on 16 September, stop-loss at minus 25bps). The premise for this trade was to hedge against a potential sharp selloff in the event of a foreign exodus. We favoured Malaysian bonds over the medium term and wanted to maintain a Neutral duration outlook, as opposed to shifting to Underweight. We opted to be Neutral via being long the wings and short the belly, as the belly tends to underperform in a sell-off.

Over the past month, risk appetite has generally improved and Malaysian bonds have continued to perform well. As such, the belly of the curve has outperformed the wings. We maintain our Neutral duration outlook on Malaysian bonds.