Economies, Currencies, Rates Daily Breakfast Spread

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1 Economies, Currencies, Rates Daily Breakfast Spread DBS Group Research August 013 Economics US Fed expectations Implied fed funds rate Dec13 Jun1 Dec1 Market Current wk ago DBS Source: Bloomberg fed fund futures Notes: Given a FF target rate of 0.5%, an implied FF rate of 0.30 is interpreted roughly as the market pricing in a 0% chance of a Fed hike to 0.50% from 0.5% (30 is 1/5th of the distance to 50 from 5). DBS expectations are presented in discrete blocks of 5bps, i.e., the Fed moves or it does not. See also Policy rate forecasts below. Greater China, Korea KR: According to the statistics released yesterday, short-term external debt decreased further by USD.bn in Q. Meanwhile, with the current account remaining strong to offset portfolio capital outflows, foreign reserves continued to increase by USD.3bn in April-July. As a result, the ratio between short-term external debt and foreign reserves has fallen to 3.% as of end-q, the lowest over seven years. The strength of external position explains the relative stability of the KRW in recent months, despite rising capital outflows from the emerging markets amid speculations on US QE tapering. The KRW gained 0.8% versus the USD between June 1st and August 0th, compared to the sharp declines in Southeast Asian currencies (IDR: -8%, MYR: -%, THB: -%) and the Indian rupee (-11%). Drawing lessons from the 008 global financial crisis, the Korean authorities have introduced a series of macroprudential measures in the last few years to curb hot money inflows and control external borrowings. Meanwhile, the large adjustment of the KRW in 008 has strengthened the country s trade competitiveness and provided support to the current account balance. As the present situation of capital outflows is manageable and tolerable in Korea, there is little pressure for the central bank to maintain interest rates high to attract foreign investment and defend the currency. The improvement of the KRW s stability has also helped to anchor inflation expectations. This allowed policymakers to focus on economic growth and keep monetary policy accommodative. The BOK cut rates by 5bps in May and is expected to hold the benchmark rate at.50% in the rest of this year. Southeast Asia, India IN: The sense of relief on Wednesday was short-lived as the currency closed at a fresh record low, even as the longer-tenor bond yields corrected sharply lower as a result of the RBI measures. While the intermittent central bank presence and restrictive measures have helped to slow the unit s descent in recent weeks, a convincing turnaround is proving elusive in absence of a conducive external environment. In this light, turning focus to the sagging growth prospects and weak investment climate might prove more beneficial instead of the singleminded focus on the currency. Intuitively, a more positive domestic backdrop will help stabilise the unit longer-out. In the short-term, however, there are more downside risks rather than positive surprises on the data and policy front, which could revive concerns. Apart from the monthly high frequency prints, in focus will be the 1Q FY13/1 GDP (Apr-Jun13) growth numbers due by late-aug, where we look for a weaker reading from Jan-Mar13 s.8% YoY. There are risks that despite the reversal in the government s austerity measures and support from the agricultural support, the downside momentum might gather momentum in the coming quarters on lack of affirmative policy action by the authorities. We draw the line at 5% for FY13/1, though headwinds are still significant. The central bank meets thereafter, interestingly the same day as US FOMC. This will mark the first under the new RBI Governor Raghuram Rajan, nonetheless we expect a follow-up of his predecessor s cautious rhetoric at the review. More importantly, developments in the interim could build the pressure on the au- 1

2 G3 thorities to act decisively and necessitate further liquidity tightening measures (for instance a hike in the cash reserve ratio). But as recent action has signalled, a distinction will be made by providing a floor for short-term rates whilst keeping long-term yields within acceptable levels (close to 8%). An increase in the benchmark rate, however, is likely to be tapped as a final resort given already sub-par growth outlook and to avoid adverse impact on credit growth. Further out are the Apr-Jun13 current account numbers. The Q FY1/13 (i.e Jan-Mar13) current account deficit (CAD) had improved significantly to -3.% of GDP, from record high -.7% in Oct-Dec1. However the relief will be short-lived as the 1Q (Apr-Jun13) balance of payments could be poor on two counts i) sharp jump in gold imports during the quarter and by extension, deterioration in the trade balance point to a wider current account. Our estimates are for a jump back in the CAD above.0% of GDP in 1Q; ii) sizeable outflows from the equity and debt markets since late-may threaten to fall short of the financing needs, thus rekindling concerns. In sum, stop-gap measures by way of policy tweaks and direct FX intervention is likely to persist, but the impact will be shallow. US: Existing home sales rose sharply in July, putting a dose of acceleration into the upward trend they ve run for two years. The.5% (MoM, sa) July jump lifted the on-year growth rate to 17% and change, a good -5 percentage points higher than the 1%-ish trend rate. The Fed noted in its 31Jul minutes, also released yesterday, that higher mortgage rates hadn t dented housing activity just yet, knock on wood, and yesterday s sales figures certainly put some icing on that cake. Time will tell whether higher mortgage rates 30-year rates have risen by 115 basis points to.5% get people off the couch or put them there. Jobless claims are on tap today. They have been one of the brighter spots in the recent data, falling to 38k three weeks ago and further to 30k last week. The -week moving average figure is down to 33k after seeming to be stuck at 35k for the four months since late-april. A 330k consensus outcome this week would drop to wma to 38k, a significant difference from 35k that would bode well for payrolls and the unemployment rate. The Fed minutes didn t put any bias into the September vs December tapering debate but the doves have been notably quiet of late and absent some outright poor data, September looks increasingly likely. Tomorrow s new home sales are expected to fall by % (MoM, sa) but after surging 8% in June that wouldn t be a poor outcome at all. Fixed Income CN: Front-end onshore swap rates (1Y, Y & 3Y) are likely to hover in a ranges over the coming months. The June liquidity squeeze is over. After hitting a peak of 10.8% on June 0, the 7-day repo rate (which serves as the floating leg fixing index of onshore swaps) is back below 5%. A temporary surge in the repo rate of that magnitude is not a unique occurrence. The rate surged several times over the past few years; most recently it surged three times in 011 (Jan-011, Jun- 011 and Dec-011). While the upward pressure on the repo rate never lasted longer than 30 days, swap rates have tended to recover slowly. In the episodes of Jun-011 and Dec-011, 3-month Shibor and front-end CNY swap rates (1Y, Y & 3Y) stayed elevated for a few months (relatively to the period preceding the liquidity squeeze). Currently, interbank rates and front-end swap rates are exhibiting the same behavior. While the recent episode of tight liquidity and those in 011 are associated with different objectives, market participants are concerned that liquidity conditions in the banking system could tighten again. Notably, policy actions to tighten liquidity in 011 were responses to rising property prices amid signs of overheating in the domestic economy. In contrast, the most recent episode of liquidity tightening was aimed at encouraging banks to maintain stable and appropriate credit growth. We think that concerns about policy uncertainty

3 3M Shibor & 7D Repo Rate %pa Y, Y & 3Y CNY Swap Rates vs 7D Repo Rate %pa 1 5 3Y CNY Swap 10.5 Y CNY Swap 1Y CNY Swap M Shibor (lhs) 1 7D Repo Rate (rhs) 0 Jan-09 Jan-10 Jan-11 Jan-1 Jan D Repo Rate (rhs) 1 Jan-1 Jul-1 Jan-13 Jul-13 0 and variable liquidity conditions will persist for some time that should keep term premia high. Moreover, the economic outlook is improving and that could lead market participants to revise their expectations regarding the future path of policy interest rates. While GDP growth has moderated, the People s Bank of China (PBoC) governor Zhou Xiaochuan indicated on August 19 that the economic growth rate is robust and unlikely to slow further. This suggests that the policy stance will not become accommodative. Moreover, it was also hinted that the PBoC is prepared to liberalize commercial lenders deposit rates, implying room for further upward adjustments in markets rates as reforms continue. 3

4 Economic calendar Event Consensus Actual Previous Aug 19 (Mon) JP: trade balance (Jul) -JPY 773.5bn -JPY 10.0bn -JPY 18.3bn -- exports 1.8% y/y 1.% y/y 7.% y/y -- imports 1.0% y/y 19.% y/y 11.8% y/y TH: GDP (Q) 3.3% y/y.8% y/y 5.3% y/y Aug 0 (Tue) JP: all industries activity index (Jun) -0.7% m/m sa -0.% m/m sa 1.1% m/m sa TW: export orders (Jul) -1.0% y/y 0.5% y/y -3.5% y/y HK: CPI (Jul).9% y/y.9% y/y.1% y/y Aug 1 (Wed) MY: GDP (Q).7% y/y.3% y/y.1% y/y MY: CPI (Jul).0% y/y.0% y/y 1.8% y/y US: existing home sales (Jul) 5.15mn 5.39mn 5.0mn Aug (Thur) TW: unemployment rate (Jul).18%.17% EZ: PMI composite (Aug A) US: initial jobless claims (Aug 17) 330k 30k Aug 3 (Fri) SG: CPI (Jul).1% y/y 1.8% y/y TW: industrial production (Jul) -0.53% y/y -0.3% y/y US: new home sales (Jul) 87k 97k EZ: consumer confidence (Aug A) Central bank policy calendar Policy Date Country Rate Current Consensus DBS Actual This week 1-Aug TH 1 day repo.50%.50%.50%.50% Next week No policy meeting Last week 15-Aug ID o/n reference rate.50%.50%.50%.50%

5 GDP & inflation forecasts GDP growth, % YoY CPI inflation, % YoY f 01f f 01f 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 Market prices Policy interest rates, eop Exchange rates, eop current 3Q13 Q13 1Q1 Q1 current 3Q13 Q13 1Q1 Q1 US Japan Eurozone Indonesia ,775 9,850 9,800 9,750 9,700 Malaysia Philippines Singapore n.a. n.a. n.a. n.a. n.a Thailand Vietnam^ ,100 1,100 1,00 1,300 1,00 China* Hong Kong n.a. n.a. n.a. n.a. n.a Taiwan Korea India ^ prime rate; * 1-yr lending rate Policy rate 10Y bond yield FX Equities Current Current 1wk chg Current 1wk chg Index Current 1wk chg (%) (%) (bps) (%) (%) US S&P 500 1,3 -.5 Japan Topix 1,1 -. Eurozone Eurostoxx,89 -. Indonesia JCI, Malaysia KLCI 1, Philippines PCI,5 1.3 Singapore Ccy policy FSSTI 3, Thailand SET 1, China S'hai Comp, Hong Kong Ccy policy HSI 1, Taiwan TWSE 7, Korea Kospi 1, India Sensex 17, Source: Bloomberg 5

6 Contributors: Economics David Carbon Singapore (5) Irvin Seah Singapore (5) Tieying Ma Singapore (5) Radhika Rao Singapore (5) Eugene Leow Singapore (5) Chris Leung Hong Kong (85) Currencies / Fixed Income Philip Wee Singapore (5) Jens Lauschke Singapore (5) Nathan Chow Hong Kong (5) Administrative support Violet Lee Singapore (5) Please direct distribution queries to Violet Lee on Client Contacts Singapore DBS Bank (5) DBS Nominees (Pte) Ltd (5) DBS Vickers Securities (5) The Islamic Bank of Asia (5) China DBS Beijing (8 10) DBS Dongguan (8 79) DBS Guangzhou (8 0) DBS Hangzhou (8 571) DBS Shanghai (8 1) DBS Shenzhen (8 755) DBS Suzhou (8 51) DBS Tianjin (8 ) Hong Kong DBS Hong Kong (85) DBS Asia Capital (85) India DBS Chennai (91 ) DBS New Delhi (91 11) DBS Mumbai (91 ) Indonesia DBS Jakarta ( 1) /8 DBS Medan ( 1) DBS Surabaya ( 1) Japan DBS Tokyo (81 3) Korea DBS Seoul (8 ) Malaysia DBS Kuala Lumpur ( 03) DBS Labuan ( 08) Hwang-DBS Penang ( 0) 3 99 Philippines DBS Manila (3 ) Taiwan DBS Changhua (88 ) DBS Kaohsiung (88 7) DBS Taichung (88 ) 30 1 DBS Tainan (88 ) DBS Taipei (88 ) DBS Taoyuan (88 3) 7100 Thailand DBS Bangkok ( ) United Kingdom DBS London ( 0) UAE DBS Dubai (97 1) USA DBS Los Angeles (1 13) 7 0 Vietnam DBS Hanoi Rep Office (8) Ho Chi Minh City (8 8)

7 Recent Research US: Excess capacity, no inflation 1 Aug 13 IN: Short-term focus, longer-term perils 19 Aug 13 SG: Restructuring on track 1 Aug 13 TW: Coping with China s transition 15 Aug 13 Asia: new drivers, new risks the impact of a slower China on regional economies and currencies Aug 13 CNH: Key messages from the Sino-US Dialogue 30 Jul 13 CNH: PBoC relaxes rules for RMB crossborder 1 Jul 13 activities TW: Less vulnerable than most 9 Jul 13 US Fed: Three up, three down 8 Jul 13 Asia cyclical dashboard: grinding it out 3 Jul 13 IN: Fretting over Fed QE 8 Jun 13 US Fed: too hot to trot? Jun 13 VN: At easing s end 1 Jun 13 TH, ID, PH: Roadmap to Jun 13 Qtrly: Economics-Markets-Strategy 3Q13 13 Jun 13 Asia property: How high the moon? Jun 13 CN: Sino-South Korean economic 9 May 13 relationship CNH: Qianhai to offer CNH trust products 1 May 13 KR&TW: Examining the yen s impact 7 May 13 CN: Sino-Australian relationship reaching new highs 9 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? Apr 13 PH: Harnessing liquidity 3 Apr 13 US Treasuries: Expensive 1 Apr 13 TW: Is Taiwan exiting China? 7 Mar 13 CNH: RQFII will not deplete offshore liquidity 1 Mar 13 Qtrly: Economics-Markets-Strategy Q13 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 7 Feb 13 SG budget: Another push on restructuring Feb 13 CN: The new push for urbanization 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 1 Feb 13 IN: Exception to the rule Feb 13 CNH: Eclipsing the NDF market 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? 9 Jan 13 ID: Fuel price pressures 3 Jan13 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. 7