Economies, Currencies, Rates Daily Breakfast Spread

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1 Economies, Currencies, Rates Daily Breakfast Spread DBS Group Research 28 June 2013 Economics US Fed expectations Source: Bloomberg fed fund futures Implied fed funds rate Jun13 Dec13 Jun14 Market Current wk ago DBS Notes: Given a FF target rate of 0.25%, an implied FF rate of 0.30 is interpreted roughly as the market pricing in a 20% chance of a Fed hike to 0.50% from 0.25% (30 is 1/5th of the distance to 50 from 25). DBS expectations are presented in discrete blocks of 25bps, i.e., the Fed moves or it does not. See also Policy rate forecasts below. Greater China, Korea TW: Taiwan s central bank (CBC) yesterday kept the benchmark discount rate unchanged at 1.875% as expected, balancing between the objectives of supporting economic growth and containing asset prices inflation / safeguarding financial stability. Interestingly, the central bank released an article explaining the difficulty of imitating Japan s Abenomics. The CBC highlights that real interest rates in Taiwan are much lower than in Japan and bank credit growth is much stronger. Unlike the JPY, the TWD is not a major international currency. Meanwhile, tax rates in Taiwan are amongst the lowest in the world and public debt level has approached Taiwan s legal ceiling. The potential negative impacts of Abenomics are also pointed out, including a loss of investor confidence on Japan s government bonds, a spike in yields and volatility in equity prices and exchange rates. All of these arguments reflect the authorities reluctance of pursuing aggressive monetary and fiscal policy easing in order to avoid the destabilizing effects on the financial markets and on the real economy. Lastly, the central bank says that the most effective element of Abenomics is structural reforms, and Taiwan has already been working towards this direction. Regarding the impact of a reduction of the Fed s QE, the central bank yesterday only said that the recent volatility in Taiwan s financial markets was relatively low compared to other countries in the region. We also agree that the Fed s QE reduction is not a particular worry for Taiwan. The pressures of capital outflows should not be severe, as the economy didn t receive large size of foreign inflows during the previous QE episodes and the current account balances are very strong. In the longer term, if the Fed is correct that the US recovery will gather pace in and conditions will mature for QE exit, Taiwan s economic growth should also accelerate thanks to the procyclical nature of its exports and large trade exposure to the US market. This will in turn, allow the CBC to normalize domestic monetary policy. During yesterday s policy statement, the CBC has maintained the view that economic outlook will turn better from 2H13, which hints that the next policy move would be a rate hike rather than a cut. Southeast Asia, India IN: The 4Q FY12/13 external balance data was released on Thursday, a day ahead of schedule. Speculation that the release was brought forward to provide some comfort to the markets might not be too off the mark, especially as the current account balance took a step back from record deterioration in the previous quarter. 4Q (i.e Jan-Mar13) current account deficit (CAD) improved significantly to -USD 18.1bn from the revised -USD 31.8bn the quarter before. As a percentage of GDP, the shortfall nearly halved to 3.6% of GDP, from record high 6.7% in Oct- Dec12, surpassing consensus estimates. Nonetheless, it still kept the FY12/13 CAD at record high 4.8% of GDP, from 4.2% the year before. The breakdown revealed that bulk of the improvement was concentrated in the merchandise (deficit narrowed by 21% QoQ) and software export earnings (jumped circa 8%). Here, slowing domestic demand and cutback in fiscal spending contributed to the improved non-commodities trade balance. 1

2 Among the drags, outflows from the investment income category persisted. The latter (which captures the interest burden) is likely to stay inflated as the authorities are keen to boost capital inflows and encourage offshore borrowings in a bid to step-up the onshore dollar supplies. Testament to this, the central bank has opened up several sectors to the overseas borrowing option, whilst simultaneously permitting these proceeds to be used to repay the foreign currency convertible bonds (FCCBs). While corporates have actively tapped this funding source, the pitfalls cannot be ignored. In view of the recent rupee tumble, borrowers with substantial unhedged exposure could suffer significant marked-tomarket losses, an aspect that the RBI has highlighted in recent months. From constituting 20% of external debt in , the share of these external commercial borrowings rose to 30% in At the other end of the equation, the financial account registered net inflows worth USD 17.6bn in 4Q, fulfilling the financing requirements, but thinned from 3Q s peak at USD 22.4bn. Contrary to expectations, bulk of the support stemmed from foreign direct investments alongside external commercial borrowings and higher trade credit/advances. In contrast, portfolio inflows and non-resident deposits moderated. In sum, the balance of payments position witnessed a net surplus of USD 2.6bn in 4Q, taking FY12/13 total to USD 3.8bn. This marks an improvement from USD 12.8bn deficit in FY11/12. That said, there is no free lunch as the sizeable foreign inflows led the external debt to rise 13% QoQ. Of concern, the share of ECBs was the highest at 31% of total debt, compared with 25% short-term debt and NRI deposits a shade below 20%. Also worryingly, the coverage of the debt position by the existing FX reserves continues to slip (see the left chart) and fell to 74.9% by Mar13, down from Mar12 s 85.2%. Overall, the improved external balance was well-received, but is essentially backward looking. The relief phase is thereby likely to pass and focus to fall back on the 1Q 13/14 outlook. The 1Q (Apr-Jun13) balance of payments will be poor on two counts a) sharp jump in gold imports and by extension, deterioration in the trade balance point to a wider current account. Our estimates are for a jump back in the CAD to % of GDP in 1Q; b) sizeable outflows from the equity and debt markets since late-may threaten to fall short of the financing needs, thus rekindling concerns over the balance of payments (BOP) position. A revisit of the 1991 BOP crisis however, is distant especially as the foreign exchange reserves stock is sizeable by historical standards. The imports cover whilst on the decline is far from alarming levels. A more market-oriented exchange rate and contained global commodity prices also help put worries to rest. Nonetheless risks from prolonged capital outflows warrant attention and might neccessitate official counter-action. This as steady outflows could aggravate downside pressure on the rupee and raise cost of funds, hence further delaying the anticipated modest recovery in growth this year. IN: Externaldebt on the rise USD bn FX reserves External debt IN: Capital flows offset current acct weakness USD bn Latest: Mar13 FX res (only FX) 50 Jun-03 Jun-06 Jun-09 Jun / / / /13 Curr acct Capital/ Financial acct 2

3 G3 US: Are we back to bad news is good news again? Apparently. The headlines this morning read: Stocks stage strongest 3-day rally since Jan on economic data. Super, one thinks, let s have a look. Hold on consumption s not so good. Hmm jobless claims not so hot either. Housing? Yea, Fed s still buying a bunch. Nothing else on the screen? Hmm, wonder who was writing the headlines this morning. I guess we really are back to bad news is good again. Start with consumption. We already know from yesterday s GDP report that Q1 consumer spending was revised down to 2.6% (QoQ, saar). What s happening on the margin the monthly stuff? The Bloomberg screen says spending grew by 0.3% (MoM, sa) in May. But April was revised down to minus 0.3%. Zero consumption growth over the past two months: not good. Real spending over the past two months has been a little better growth has averaged 0.04% but that s practically zero too and the reason it s positive at all, given that nominal growth is zero, is because are falling. The PCE deflator has dropped the past two months on average by 0.1% per month. Falling prices isn t disinflation. It s deflation. It s only two months but it s still the opposite of what the Fed s looking for. No wonder gold prices are falling. Under the hood, real consumption looks anything but robust. In other words, zero headline growth over the past two months is not because auto sales temporarily plunged, for example. Services consumption (60% of the total) has fallen in each of the past two months by 0.7% per month. Nondurables is up by an average of 0.1% but the sum of the two core consumption (88% of the total) has still fallen for the past two months. Second quarter consumption growth is thus trending at zero. The QoQ figure should still show 1.5% in 2Q but, plainly, that s not coming from growth in the months of 2Q: it s left over arithmetic remnants from Q1. Jobless claims? They came in at 346k yesterday, smack on the 4-week average of 346k. Not only is the weekly number equal to the 4wma, but the 4wma is the same as it was 2 weeks ago, 4 weeks ago, and 6 and 8 weeks ago too. Zero change for 9 weeks. More and more evidence accumulates suggesting we re simply at the end of the line for improvements in jobless claims. We ve talked about this regularly of late: historically, claims don t go much lower than where they are today unless the economy is entering a boom (chart below). Plainly, that s not the case. The implication is that further improvements in nonfarm payrolls and the unemployment rate will have to come from greater hiring, not less firing. That may be tough given the still sub-2% GDP growth the economy is delivering. US - initial jobless claims thousand claims/week, seas adj, 4wma recession Dotcom crash Subprime crash 250 Dotcom Subprime surge surge 200 Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Jan-14 Current: 346k -- about "normal" Housing? Looks good. Pending sales and existing sales are both advancing at a 12% on-year rate. With the Fed in effect buying $40bn of homes each month, that seems unlikely to stop. Unless, of course, the Fed stops buying 3

4 Currencies FX: Fed tapering fears sorely depressed investor sentiment in June. Markets started to sell risk across most asset classes after Fed Chairman Ben Bernanke said on May 22 that the Fed could taper asset purchases in the next few meetings. The sell-off turned into panic after Bernanke said on June 19 that the Fed could end asset purchases by mid-2014 if the Fed s assumptions materialized. In the currency markets, yen crosses, namely against the commodity currencies, were sold. The hottest stocks and currencies in Southeast Asia Thailand, Philippines and Indonesia were dumped. Both the Malaysian ringgit and Philippine peso depreciated to their lows seen during the outbreak of the Eurozone crisis in September The deficit-laden Indian rupee was brought to a new lifetime. Even the Chinese yuan posted its first monthly depreciation since February. The export-led Singapore dollar and Taiwan dollar were the most resilient amongst the managed floating exchange rates in Asia ex Japan. Despite the stronger US dollar in the emerging Asia, the US dollar was actually weak against the components of its DXY index the Japanese yen, Swiss franc, British pound and euro. This week, Fed officials, hawks and doves alike, told markets this week that they had gone overboard in bringing forward US rate hikes into This should not come as a surprise. The Fed s priority is to safeguard the US recovery, which it still considers fragile and yet to return to a sustainable growth path. From its perspective, the market s adverse reaction to its tapering intentions threatened to be self-defeating. For example, the sell-off in commodities will drive down inflation expectations. US policymakers do not want America to keep leading the global recovery alone. It will be hard for the G20 to return to the agenda of global rebalancing with the Chinese yuan and Asian currencies under depreciation pressures. For now, the damage control exercise in the last week of June has helped to stabilize long bond yields and non-dxy currencies. During this volatile summer, one could only be thankful for small favors. Fed tapering fears was a risk-off trade in June % change vs USD 27 Jun vs 31 May * USD is performance of DXY (USD) index MAJOR CURRENCIES B R I C S -6.1 EMERGING ASIA JPY CHF GBP EUR DXY CAD NZD AUD ZAR CNY BRL RUB INR HKD VND SGD TWD IDR KRW PHP MYR THB 4

5 Economic calendar Jun 24 (Mon) SG: CPI (May) 1.7% y/y 1.6% y/y 1.5% y/y TW: IP (May) -1.20% y/y -0.07% y/y -0.80% y/y US: Dallas Fed Manuf Activity (Jun) -1.0% -0.3% -10.5% Jun 25 (Tue) PH: Imports (Apr) -1.1% y/y 7.4% y/y -8.4% y/y -Trade balance (Apr) -USD 680mn -USD 1020mn -USD 593mn HK: exports (May) 3.4% y/y -1.0% y/y 9.0% y/y - imports 3.5% y/y 1.7% y/y 7.7% y/y US: Durable goods orders (May) 3.0% 3.6% 3.6% US: S&P Case/Shiller Home prices (Apr) US: Consumer confidence (Jun) US: New home sales (May) 460K 476K 454K Jun 26 (Wed) TH: customs trd bal (May) -USD 1.7bn -USD 2.3bn -USD 4.14bn --exports -4.15% y/y -5.25% y/y 2.89% y/y --imports -3.7% y/y -2.14% y/y 8.91% y/y SG: IP (May) 0.1% y/y 2.1% y/y 4.7% y/y US: GDP (1Q - Third reading) - saar 2.4% 1.8% 2.4% Jun 27 (Thur) KR: Current account (May) -USD 8.6bn -USD 3.92bn IN: Current account bal (4Q12/13) -USD 21bn -USD 18.1bn -USD 31.8bn EZ: EC consumer confidence (Jun) US: Personal income (May) 0.2% 0.5% 0.0% US: Initial jobless claims (Jun 21) 345K 346K 355K US: Pending home sales (May) 8.3% y/y 12.5% y/y 13.9% y/y US: PCE Core (May) 1.1% y/y 1.1% y/y 1.1% y/y Jun 28 (Fri) KR: IP (May) -1.2% y/y -1.4% y/y 1.7% y/y JP: Jobless rate (May) 4.0% 4.1% 4.1% JP: National CPI (May) -0.4% y/y -0.3% y/y -0.7% y/y JP: IP (May P) -2.4% y/y -1.0% y/y -3.4% y/y TH: trade balance (May) -USD 1.62bn -- BOP based exports 3.7% y/y -- BOP based imports 8.5% y/y TH: Manufg production (May) -5.0% y/y -3.8% y/y US: Univ of Michigan confidence (Jun F Central bank policy calendar Policy Date Country Rate Current Consensus DBS Actual 27-Jun TW disc rate 1.88% 1.88% 1.88% 1.88% Next week 4-Jul Ezone 7-day refi rate 0.50% 0.50% 0.50% Last week 17-Jun IN o/n repo 7.25% 7.25% 7.25% 7.25% 19-Jun US FDTR 0.25% 0.25% 0.25% 0.25% 5

6 GDP & inflation forecasts GDP growth, % YoY CPI inflation, % YoY f 2014f f 2014f US Japan Eurozone Indonesia Malaysia Philippines Singapore Thailand Vietnam China Hong Kong Taiwan Korea India* * India data & forecasts refer to fiscal years beginning April; inflation is WPI Source: CEIC and DBS Research Policy & exchange rate forecasts Policy interest rates, eop Exchange rates, eop current 3Q13 4Q13 1Q14 2Q14 current 3Q13 4Q13 1Q14 2Q14 US Japan Eurozone Indonesia ,908 9,850 9,800 9,750 9,700 Malaysia Philippines Singapore n.a. n.a. n.a. n.a. n.a Thailand Vietnam^ ,018 21,100 21,200 21,300 21,400 China* Hong Kong n.a. n.a. n.a. n.a. n.a Taiwan Korea India ^ prime rate; * 1-yr lending rate Market prices Policy rate 10Y bond yield FX Equities Current Current 1wk chg Current 1wk chg Index Current 1wk chg (%) (%) (bps) (%) (%) US S&P 500 1, Japan Topix 1, Eurozone Eurostoxx 2, Indonesia JCI 4, Malaysia KLCI 1, Philippines PCI 6, Singapore Ccy policy FSSTI 3, Thailand SET 1, China S'hai Comp 1, Hong Kong Ccy policy HSI 20, Taiwan TWSE 7, Korea Kospi 1, India Sensex 18, Source: Bloomberg 6

7 Contributors: Economics David Carbon Singapore (65) Irvin Seah Singapore (65) Tieying Ma Singapore (65) Radhika Rao Singapore (65) Eugene Leow Singapore (65) Chris Leung Hong Kong (852) Currencies / Fixed Income Philip Wee Singapore (65) Jens Lauschke Singapore (65) Nathan Chow Hong Kong (65) Administrative support Violet Lee Singapore (65) Please direct distribution queries to Violet Lee on Client Contacts Singapore DBS Bank (65) DBS Nominees (Pte) Ltd (65) DBS Vickers Securities (65) The Islamic Bank of Asia (65) China DBS Beijing (86 10) DBS Dongguan (86 769) DBS Guangzhou (86 20) DBS Hangzhou (86 571) DBS Shanghai (86 21) DBS Shenzhen (86 755) DBS Suzhou (86 512) DBS Tianjin (86 22) Hong Kong DBS Hong Kong (852) DBS Asia Capital (852) India DBS Chennai (91 44) DBS New Delhi (91 11) DBS Mumbai (91 22) Indonesia DBS Jakarta (62 21) /8 DBS Medan (62 61) DBS Surabaya (62 21) Japan DBS Tokyo (81 3) Korea DBS Seoul (82 2) Malaysia DBS Kuala Lumpur (6 03) DBS Labuan (6 08) Hwang-DBS Penang (6 04) Philippines DBS Manila (63 2) Taiwan DBS Changhua (886 4) DBS Kaohsiung (886 7) DBS Taichung (886 4) DBS Tainan (886 6) DBS Taipei (886 2) DBS Taoyuan (886 3) Thailand DBS Bangkok (66 2) United Kingdom DBS London (44 20) UAE DBS Dubai (97 1) USA DBS Los Angeles (1 213) Vietnam DBS Hanoi Rep Office (844) Ho Chi Minh City (84 8)

8 Recent Research US Fed: too hot to trot? 24 Jun 13 VN: At easing s end 21 Jun 13 TH, ID, PH: Roadmap to Jun 13 Qtrly: Economics-Markets-Strategy 3Q13 13 Jun 13 Asia property: How high the moon? 4 Jun 13 CN: Sino-South Korean economic 29 May 13 relationship CNH: Qianhai to offer CNH trust products 16 May 13 KR&TW: Examining the yen s impact 7 May 13 CN: Sino-Australian relationship reaching new highs 29 Apr 13 JP: Abenomics - one achievement, three challenges 17 Apr 13 CN: Deepening economic ties with Russia 9 Apr 13 MY: Sing-Iskandar: Creating synergies 8 Apr 13 SGD policy - a balancing act 5 Apr 13 IN: Where to inflation? 4 Apr 13 PH: Harnessing liquidity 3 Apr 13 US Treasuries: Expensive 1 Apr 13 TW: Is Taiwan exiting China 27 Mar 13 CNH: RQFII will not deplete offshore liquidity 21 Mar 13 Qtrly: Economics-Markets-Strategy 2Q13 24 Mar 13 CN: A global RMB: Inventing the necessary 11 Mar 13 CN: Interest rates must rise 8 Mar 13 IN: Pragmatic budget, tough to meet 1 Mar 13 TH: Keeping an eye on excesses 27 Feb 13 SG budget: Another push on restructuring 26 Feb 13 CN: The new push for urbanization 22 Feb 13 CNH: Singapore and Taiwan style 19 Feb 13 The fall and fall of Japanese FDI into Asia 19 Feb 13 SG budget: Focusing on the longer-term 18 Feb 13 Asia: cyclical dashboard 14 Feb 13 IN: Exception to the rule 6 Feb 13 CNH: Eclipsing the NDF market 4 Feb 13 JP: USD/JPY to go triple-digit 31 Jan 13 Asia: Weaker JPY does not imply weaker AXJ 30 Jan 13 US unemployment: Which trend is your friend? 29 Jan 13 ID: Fuel price pressures Asia: towards a better 2013 SG: Lowering property market risk KR/TW: Is yen depreciation a big worry? Asia: Curves pricing interest rate risk TH: Government-sponsored growth US: 2013 inflation risks? Not so much 23 Jan13 18Jan13 18Jan13 18Jan13 15 Jan13 14 Jan13 27 Dec12 Qtrly: Economics-Markets-Strategy 1Q13 13 Dec 12 JP: Gauging the QE impact 30 Nov 12 ID: Foreign interest returns 19 Nov 12 CN: How efficient is China s investment? 12 Nov 12 US: Deleveraging progress report 30 Oct 12 Disclaimer: The information herein is published by DBS Bank Ltd (the Company ). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. 8