Monday s The Week Ahead

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1 Economies, Currencies, Rates Daily Breakfast Spread DBS Group Research 23 September 2013 Monday s The Week Ahead Economics US Fed expectations Implied fed funds rate Dec13 Jun14 Dec14 Market Current wk ago DBS Source: Bloomberg fed fund futures 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 CN: The 29-square-kilometer Shanghai Free Trade Zone ( FTZ ) is slated to be launched on 29th September and will encompass four existing tariff-free zones around the Shanghai area. There are hitherto no guidelines on how the zone would operate, but customs approvals will probably be simplified and companies in the zone, both local and foreign, will likely enjoy preferential corporate income tax rates. The removal of trade barriers is a key feature and can be implemented quickly. Experiments on yuan convertibility and interest rate liberalization should follow soon after supporting soft infrastructure is set up - financial institutions will be encouraged to set up shop within the zone to provide yuan related services and trade finance. At present, the most pressing challenge would be how to set up an effective financial border for the zone. There must be regulations to prevent access to tax concessions and yuan convertibility by non-zone companies. In later stages, the zone could be an incubator for the services sector, which already accounts for 60% of Shanghai s GDP. The initiation of the Shanghai FTZ should not be seen as a policy designed to revive short term economic growth at 7.5%, Shanghai s GDP growth has underperformed the national average in The ultimate goal is to replicate the model nationwide for longer term economic viability. There are reports that Guangdong, Tianjin and Xiamen have made applications to become FTZs as well. China s decision to initiate the free trade zone shows that it has not given up on the trade sector despite its declining significance to GDP growth. Rather, it is adopting an innovative approach to instill competitiveness in the sector. This is a perfect example of how the leadership can reinvigorate the economy without solely reliant on fiscal and monetary stimulus. Southeast Asia, India TH: The August trade data due this week is unlikely to alter our view on the economy, although some points are worth highlighting. We expect better export data for August: negative 0.2% YoY growth in the month, as compared to -1.5% in July. The THB NEER has moderated further in August but any boost to export was probably marginal. Without a significant bounce in global demand, exports will remain a drag on growth. Meanwhile, the trade deficit probably narrowed in August, to USD 1.8bn from USD 2.3bn in July. Imports of capital goods have remained strong and are driving imports overall. The sustained strength in the domestic economy should help to offset some of the drag from external demand. Capacity utilization has nonetheless fallen in recent months. SG: Inflation pressure appears benign for now as Aug13 CPI inflation is expected to stay below the 2% mark. A forecast of 1.8% YoY has been penciled into our forecast, which is a tad lower compared the 1.9% reading in the previous month. On surface, it looks as if inflation is easing. But try telling ten Singaporeans about it and eleven of them will disagree with you. 1

2 And it s not difficult to understand why. Headline number came off sharply in March due to drastic curbs on car loans by the Monetary Authority of Singapore. That brought about a sharp correction in the CEO premiums. At one stage, premiums were on average about 15% down from the levels in Apr- May. And note that private transport CPI has a significant weightage of about 11.7%, of which it is mainly dependent on the COE premiums. But beyond the correction in COE premiums, underlying cost pressure within the economy remains extremely high. The labour market is still tight and higher business costs are cascading into higher consumer inflation. Moreover, this high base effect from COEs is transient. Once this lapses in Mar-Apr next year, inflation will likely hit the 4% level again. In fact, premiums are already rising and the high base effect is likely to be eroded very soon on strong consumer demand. For example, average premium is already 29% higher than the bottom in April. The high base effect will wear off in September given the outcome of the latest round of bidding. On average, COE premiums are now about 8% higher than the level in the same period last year. On balance, overall CPI inflation will surely breach the 2% comfort level in the coming months before the main spike up in April next year. This will continue to keep policymakers feet on the brake and the exchange rate policy will remain on a tightening bias. IN: In a surprise move on Friday, the new RBI Governor Raghuram Rajan raised the Repo rate by 25bps to 7.50%. By virtue of the fixed corridor, the Reverse repo was also hiked to 6.50%, while the cash reserve ratio (CRR) was left unchanged at 4%. Simultaneously, the RBI half-delivered on market expectations by partially easing liquidity restrictions put in place in July - i) The Marginal Facility Rate (MSF) was lowered by 75bps to 9.50% ii) the CRR minimum daily average requirement was reduced to 95% from 99%. The dominant tone of the policy statement was balanced, leaning on hawkish. Friday s decision highlighted that the RBI takes a serious view on containing inflationary expectations and also needs to compensate for the economy s twin deficits, even as external risks abate. A low and stable inflation outlook is necessary for long-term sustainable growth, though might carry downside risks in the immediate-term. Growth thereby is likely to remain subdued and below 5% this year. The central bank highlighted that de-subsidizing fuel prices had aggravated the pass-through from weak rupee and higher global commodity prices. And prudently so, as after a shallow pullback below 5% mark during Apr-May, WPI inflation has rebounded above 6% by Aug13 on the pass-through of tradable costs. CPI inflation meanwhile has remained above 9.5%. This is before factoring in more permanent increases from higher electricity, natural gas and coal prices. Thereby even if the risks from imported prices and inadequate food supplies turned out to be transient influences, there was no room IN: Rate hike to arrest inflationary pressures to lower the central % % YoY bank s guard. Getting a hold on inflation will also address the 9 10 current low deposit mobilization and shift 8 8 interest back into 6 financial savings. Apart from inflation, there were other important takeaways from Friday s policy. Firstly, the delay in the US Fed tapering decision had provided the RBI with the Latest Aug Apr-07 Apr-09 Apr-11 Apr-13 Repo rate- lhs WPI MSF rate - lhs

3 elbow-room to delay tightening domestic rates. However, the central bank s decision to follow-up with a hike underscores the belief that the withdrawal of the excess global liquidity was inevitable. On that account, the authorities are unwilling to be caught wrong-footed as was the case in May. Hence, the first line of defence i.e. interest rates were tapped to safeguard the currency. This also brings RBI in line with action by other emerging markets that also raised rates to protect their currencies. However, the benefit from favourable rate differentials is hampered by the equity-heavy nature of capital inflows in India, rather than debt. This has seen the RBI warm up to the idea of including India s government bonds to international bond indices. Next, the decision to partially rollback the MSF and CRR daily averages is a cautious decision to strike a balance between easing the stress on corporate/ banks balance sheets on one hand, whilst keeping the rupee stability in view. The RBI also signalled that the corridor between the MSF rate and Repo will be narrowed to 100bps from 200bps presently, bulk of which could stem from changes in the MSF rate. A complete rollback in these measures is unlikely before December, as the central bank will await better visibility on flows after the swap window closes in November. In sum, beyond the kneejerk negative reaction in the rupee and the stock markets, if the RBI pushes through with the broader financial reforms agenda alongside clear communication, the domestic financial markets will likely stabilize in the weeks ahead. On policy, Friday s hike is unlikely to mark the beginning of an aggressive rate hiking cycle. But much will depend on how growth and inflation risks evolve, with the latter likely to remain the policy prerogative. A further uptick in inflation ahead of next policy review will feed into the odds of another rate rise. Currencies FX: The US dollar is still feeling the sting from last week s FOMC meeting. Contrary to market expectations, the Fed did not taper asset purchases and downgraded its economic outlook instead. During his post-fomc press conference, Fed Chairman Ben Bernanke said that the Fed could still taper later this year if the economy improves. Market believes that if there is any taper, it is more likely to occur at the December 17-18, than the October 29-30, meeting. With Bernanke s term ending on January 31, a move at the January meeting appears unlikely. Much will depend on whether Congress can reach a compromise to lift the federal debt ceiling before the US government runs out of cash between October 18 and November 5. Bernanke said that failure here would hurt the economy, one main reason why the Fed decided to keep ensuring monetary policy stays ultraaccommodative. USD depreciated last week after Fed failed to taper asset purchases NZD MAJOR CURRENCIES CHF EUR AUD GBP CAD JPY -1.3 DXY 3.1 BRL INR B R I C S RUB 1.0 ZAR -0.0 CNY 3.9 MYR 3.0 THB SGD % change vs USD 20 Sep vs 13 Sep * USD is performance of DXY (USD) index EMERGING ASIA PHP KRW TWD IDR HKD VND 3

4 Meanwhile, the White House is believed to be close to nominating Fed Vice Chairwoman Janet Yellen to replace Fed Chairman Ben Bernanke from next February. After affirming that Yellen was the front-runner, White House officials are said to be telling Democrats in the Senate to support her. Yellen has rescheduled her speech to the Economic Club of New York planned for October 1. President Barack Obama is expected to announce the nomination in the coming weeks, possibly before his planned Asia trip on October 6. Yellen s nomination, if it comes, is considered as negative for the US dollar because she is considered a dove. Hence, the support that the US dollar derived from Fed taper expectations during the May-August period is no longer that strong. On a relative basis, other economies have also posted upside surprises. For example, real GDP in New Zealand expanded by a faster 2.5% YoY in 2Q13 vs the 2.3%, with 1Q13 growth revised up to 2.7% from 2.4%. The central banks of New Zealand and Canada also suggested that they may hike rates before the Fed. Even the Reserve Bank of Australia played down expectations for another rate cut. Speculators have, for the latest week ending September 17, given up holding on to their record net short AUD positions. With China more confident about its growth prospects, and resuming the yuan s appreciation, these speculators have reduced their net short AUD positions to their lowest levels since the May 14 week Fixed Income US: With markets now expecting the Fed to remain on hold probably until December, further upside in the intermediate and longer-term segments of the UST yield curve appears limited in the short term. To put things into context, the Fed did not embark on tapering at the FOMC meeting on September 17-18, in contrast to market expectations. As a result, the yield on 10Y UST ended the week at 2.73%, down 15bps from the preceding week. The yield on 10Y UST is likely to be rangebound between 2.65% to 2.9% in the short term as Congress deliberates on the debt ceiling. Upside to the yield on 10Y UST is likely capped at 3% (corresponding to the recent high) until the Fed starts tapering. On the downside, a revisit to the lows in May is unlikely as the perspective of market participants have changed and the intermediate sector of the yield curve is no longer anchored. The yield on 2Y UST is also likely to hover around between % in the short term. Upward pressure resulting from speculation that former Treasury Secretary Lawrence Summers is in the front running to be Bernanke s successor has dissipated. Moreover, the market is unlikely to aggressively discount rate hikes expectations amid uncertainties about the looming debt ceiling debate in Congress in the coming weeks. Beyond the short term, however, we anticipate the yield on 2Y UST to head higher relative to the yield on 5Y UST. This would translate into a flattening in the 2Y/5Y segment of the UST yield curve and a widening of the spread between the yield on 2Y UST and 3-month Libor. 4

5 Economic calendar Event Consensus Actual Previous Sep 23 (Mon) TW: unemployment rate (Aug) 4.20% sa 4.18% sa SG: CPI (Aug) 2.0% y/y 1.9% y/y EZ: PMI manufacturing (Sep A) HK: CPI (Aug) 4.4% y/y 6.9% y/y Sep 24(Tue) HK: current account (2Q) -$1.32bn Sep 25 (Wed) PH: imports (Jul) -4.8% y/y - trade balance -$370mn TW: export orders (Aug) 1.5% y/y 0.5% y/y US: durable goods orders (Aug) -0.2% m/m sa -7.4% m/m sa US: new home sales (Aug) 6.6% m/m sa -13.4% m/m sa Sep 26 (Thur) SG: industrial production (Aug) 5.2% y/y 2.7% y/y TW: industrial production (Aug) 2.0% y/y 2.1% y/y HK: exports (Aug) 4.2% y/y 10.6% y/y - imports 3.5% y/y 8.3% y/y - trade balance -HKD 39.0bn -HKD 37.2bn US: GDP (2Q T) 2.6% q/q saar 2.5% q/q saar US: pending home sales (Aug) -1.0% m/m sa -1.3% m/m sa Sep 27 (Fri) KR: current account (Aug) $6771mn JP: CPI (Aug) 0.8% y/y 0.7% y/y TH: mfg production (Aug) -1.0% y/y -4.5% y/y Central bank policy calendar Policy Date Country Rate Current Consensus DBS Actual This week 26-Sep TW disc rate 1.88% 1.88% 1.88% Next week 02-Oct EZ 7-day refi rate 0.50% Last week 19-Sep US FDTR 0.25% 0.25% 0.25% 0.25% 20-Sep IN o/n repo 7.25% 7.25% 7.25% 7.50% 5

6 GDP & inflation forecasts GDP growth, % YoY Policy & exchange rate forecasts 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 Market prices Policy interest rates, eop Exchange rates, eop current 4Q13 1Q14 2Q14 3Q14 current 4Q13 1Q14 2Q14 3Q14 US Japan Eurozone Indonesia ,041 11,150 11,200 11,250 11,300 Malaysia Philippines Singapore n.a. n.a. n.a. n.a. n.a Thailand Vietnam^ ,120 21,310 21,340 21,380 21,410 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, 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 2, Hong Kong Ccy policy HSI 23, Taiwan TWSE 8, Korea Kospi 2, India Sensex 20, Source: Bloomberg 6

7 Contributors: Economics David Carbon Singapore (65) Irvin Seah Singapore (65) Tieying Ma Singapore (65) Radhika Rao Singapore (65) Gundy Cahyadi Singapore (65) Chris Leung Hong Kong (852) Currencies / Fixed Income Philip Wee Singapore (65) Eugene Leow 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: A pre-fomc pulse-check 16 Sep 13 Qtrly: Economics-Markets-Strategy 4Q13 12 Sep 13 US unemployment: call off the search 9 Sep 13 CNH: Will Qianhai jeopardize Hong Kong s 6 Sep 13 position? Asia-vu 3: are we there yet? 5 Sep 13 IN: Down to fiscal support 4 Sep 13 US: Excess capacity, no inflation 21 Aug 13 IN: Short-term focus, longer-term perils 19 Aug 13 SG: Restructuring on track 16 Aug 13 TW: Coping with China s transition 15 Aug 13 China: a blueprint for expanding RMB usage 7 Aug 13 Asia: new drivers, new risks the impact of a 2 Aug 13 slower China on regional economies and currencies CNH: Key messages from the Sino-US Dialogue 30 Jul 13 CNH: PBoC relaxes rules for RMB crossborder 12 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 28 Jun 13 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 29 Apr 13 new highs JP: Abenomics - one achievement, three 17 Apr 13 challenges 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 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