Economies, Currencies, Rates Daily Breakfast Spread

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1 Economies, Currencies, Rates Daily Breakfast Spread DBS Group Research 12 September 2013 Economics US Fed expectations Source: Bloomberg fed fund futures Implied fed funds rate Dec13 Jun14 Dec14 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. Southeast Asia, India IN: After the surprise improvement in Aug trade numbers, focus will be on today s Jul industrial production (IP) and Aug CPI inflation releases. While the scale of contraction in headline IP could narrow to -0.5% YoY from -2.2% in June, most of this is volatility. Trend-wise, IP shows no clear changes. Despite the upturn in the core industries index in Jul, the weakness in mining and manufacturing have been notable in recent months. PMI-manufacturing which had earlier held above the 50-neutral level, also broke below on slowing new domestic and export orders. Things are not pretty on demand side of the story as well. As the 1Q FY13/14 growth numbers made plain, private consumption spending has slowed notably, hence forcing manufacturers to dip into the inventories rather than scale up production. On a related note, the jump in Aug passenger car sales by 15.4% from average 6% decline in the prior four months was a function of low base effects (plant closure of a leading carmaker distorted the year ago comparison). The sector is still plagued by weak demand conditions and high fuel/ borrowing costs, in light of which the automobile industry group expects a slowdown in full-year sales volume this year from the present estimate of 3-5%. Higher international crude prices, rupee depreciation and sustained decline in crude oil plus natural gas output have fed into input prices for businesses. These are likely to reflect in the WPI and retail inflation figures, with the latter expected to register 9.7% rise in Aug, up from 9.55% between Apr-Jul13. The upward adjustments in the administered fuel prices persisted, with petrol up 4% and diesel up 24% on the year. While the recent rupee recovery has lowered the urgency for a steep increase in the administered prices, nonetheless the staggered price rises will underpin the fuel price index. In addition, the highly weighted food price should also remain above 11% as perishables and vegetable costs were steady to higher in the month. The threat of a revival in inflationary pressures and volatile currency will keep the central bank from cutting rates any further this year. G3 US: PIMCO cuts Treasury holdings to the lowest levels since March, mortgage applications drop 13.5% in a single week plainly nobody thinks interest rates are going down. If the Fed was hoping to convince investors that tapering doesn t equal tightening, it hasn t got the message across. Or, more accurately, the point is moot. If you weren t going to refinance your house 100 basis points ago, you re not going to do it now. If you thought rates couldn t go any lower before tapering, why stick around to see what happens once it starts? Ditto for capital flows into/out of Asia. Get on dry land now, ask questions later. All this position adjustment makes rates go up irrespective of whether tapering equals tightening. De facto, it is. A couple months ago, Bernanke told Congress that if markets started to tighten on their own volition, the Fed would be obliged to push the other way. Is that now likely? Probably not, at least directly. But rising interest rates and the impact on housing are now the biggest risks to the recovery. Mortgage applications (for home purchases) fell by another 2.5% last week and now down by 17% from early-may. New home sales fell by 13.5% in July. Housing has been the poster child of the recovery over the past two years. Nothing has 1

2 US new home sales thous, saar % of recovery gone in 1 month looked better certainly not consumption and certainly not business investment. But in the single month of July, one-third of the two-year recovery in home sales was wiped off the map. That s damage and it s not subtle. Fed officials will probably spend 95% of their time at next week s FOMC meeting discussing the labor market and whether the drop in the unemployment rate to 7.3% has been for the right reasons or the wrong reasons. That s an important debate because it s becoming clearer and clearer that most of the improvement has been false. But the bigger question is what happens to housing and other interest rate sensitive expenditures in the coming months. If mortgage applications and home sales continue to fall the way they have over the past 2-3 months, tapering will end as quickly as it seems destined to begin. JP: Tokyo s winning bid for the 2020 Summer Olympic Games has boosted confidence and created optimism in Japan s financial markets. The Nikkei jumped 4% in the first three trading days this week. Olympics could be seen as an opportunity for the host countries to boost GDP growth, through building sports facilities, investing in infrastructures and promoting tourism. Historical experiences show that the economic effects of Olympics are notable for developing countries, including South Korea in 1988 and China in 2008 (Chart). By contrast, the 1996 Atlanta and the 2000 Sydney Olympics didn t create significant effects on GDP growth for the US and Australia, which are advanced economies. The growth rise in UK during the runup to the 2012 Games was mainly due to the post-crisis global recovery. It is reasonable to use US, UK or Australia s experiences as a basis to examine the impact for Japan. Infrastructures are relatively mature in advanced economies, which reduces the need of indirect spending associated with Olympics. The Tokyo government estimates that the 2020 Games will generate economic benefits worth JPY 3trn, equivalent to only 0.1% of GDP per annual over the next seven years. Similarly, the costs of hosting Olympics should also be manageable for advanced economies like Japan. Tokyo s operating budget is set at USD 3.4bn currently, far lower than the final costs of the past three Games (Athens: USD 15bn, Beijing: USD 43bn, London: USD 14bn). Assuming that the typical budget overruns push up Tokyo s costs to USD 15bn, and the costs are fully absorbed by the public sector, the impact on public debt will remain small, at about 0.3% of GDP. Both the benefits and the costs of Tokyo Olympics should be limited, in our view. That said, considering the backdrop that the Japanese economy has just recovered from the 2011 earthquake disaster and the 2008 global financial crisis, the news of hosting Olympics could give a strong boost to public confidence. The confidence effects have been reflected in higher stock market 2

3 The historical GDP performance in Olympics host countries (% YoY) Seoul Barcelona Atlanta Sydney Athens Beijing London prices, and will likely be translated into stronger consumer spending in the short term. Hopefully, this will also support PM Abe s approval rating and make it easier for him to push forward the much-needed structural and fiscal reforms. Currencies FX: China has, as of yesterday, returned the USD/CNY central parity rate down to its floor of its range established since June. With the USD weaker across-the-board in the New York session, China has scope to fix USD/ CNY at a new low. If so, this will send an important message that China is ready to resume the yuan s appreciation. At the World Economic Forum in Dalian yesterday, Premier Li Keqiang expressed confidence that China will achieve its 7.5% growth target for 2013, adding reassurances that the lower limits of growth of employment will be safeguarded. Premier Li was also certain that local government debt was under control. The results of a national audit of all local government debt are expected to be announced by the end of September. With the economy more stable, Premier Li signaled readiness to move forward with economic and financial reforms to shift the economy from exports/investments towards consumption/services. Apart from further liberalizing interest rates and increas- Offshore CNY no longer worried about China hardlanding Official trading band Legend for USD/CNY 1Y NDF outright Central parity USD/CNH 6.05 Jan-12 Jul-12 Jan-13 Jul-13 3

4 ing the capital account convertibility of the yuan, Premier Li also signaled that China is ready to open up the financial sector. Not surprisingly, the offshore non-deliverable forward (NDF) market is no longer worried about a hardlanding in China s economy. Since the start of September, the 1Y NDF outright for USD/CNY was no longer above, but back inside the official ±1% trading band. In Hong Kong, the USD/CNH has traded to new lows, closer to the lower limit of the trading band. When this happened last year, there was a relief rally in the Asian currencies from the easing tail risks in Eurozone crisis. This time around, Asian currencies are likely to be comforted by ameliorating growth concerns in China, which should help to balance the pre-fed tapering jitters. 4

5 Economic calendar Event Consensus Actual Previous Sep 9 (Mon) JP: GDP (2Q, F) 3.9% q/q saar 3.8% q/q saar 2.6% q/q saar CN: CPI (Aug) 2.6% y/y 2.6% y/y 2.7% y/y TW: trade balance (Aug) USD 3.67bn USD 4.59bn USD 3.21bn -- exports 4.0% y/y 3.6% y/y 1.6% y/y -- imports 2.6% y/y -1.2% y/y -7.6% y/y Sep 10 (Tue) PH: Unemployment rate (Jul) 7.3% sa 7.5% sa PH: exports (Jul) -1.0% y/y 2.3% y/y 4.1% y/y CN: industrial production (Aug) 9.9% y/y 10.4% y/y 9.7% y/y CN: retail sales (Aug) 13.3% y/y 13.4% y/y 13.2% y/y IN: imports (Aug) -0.7% y/y -6.2% y/y -- exports 13.0% y/y 11.6% y/y Sep 11 (Wed) KR: unemployment rate (Aug) 3.2% sa 3.1% sa 3.2% sa MY: industrial production (Jul) 4.9% y/y 7.6% y/y 3.3% y/y US: mortgage application (Sep) -13.5% sa 1.3% sa Sep 12 (Thur) JP: machine orders (Jul) 2.4% m/m sa 0.0% m/m sa -2.7% m/m sa HK: industrial production (2Q) 0.5% y/y EZ: industrial production (Jul) 0.3% m/m sa 0.7% m/m sa IN: CPI (Aug) 9.60% y/y 9.64% y/y IN: industrial production (Jul) -0.8% y/y -2.2% y/y US: initial jobless claims (Sep) 330K 323K Sep 13 (Fri) SG: unemployment rate (2Q, F) 2.1% sa JP: industrial production (Jul, F) 3.2% m/m sa SG: retail sales (Jul) -1.5% y/y -4.0% y/y US: advance retail sales (Aug) 0.4% m/m sa 0.2% m/m sa Central bank policy calendar Policy Date Country Rate Current Consensus DBS Actual This week 12-Sep KR 7 day repo rate 2.50% 2.50% 2.50% 12-Sep PH o/n rev repo 3.50% 3.50% 3.50% 12-Sep ID o/n reference rate 7.00% 7.00% 7.00% Next week 19-Sep US FDTR 0.25% 20-Sep IN o/n repo 7.25% Last week 05-Sep MY OPR 3.00% 3.00% 3.00% 3.00% 05-Sep Ezone 7-day refi rate 0.50% 0.50% 0.50% 0.50% 05-Sep JP o/n call rate 0.10% 0.10% 0.10% 0.10% monetary base target JPY270trn JPY270trn JPY270trn JPY270trn 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 4Q13 1Q14 2Q14 4Q14 US Japan Eurozone Indonesia ,235 11,150 11,200 11,250 11,300 Malaysia Philippines Singapore n.a. n.a. n.a. n.a. n.a Thailand Vietnam^ ,115 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 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 2, Hong Kong Ccy policy HSI 22, Taiwan TWSE 8, Korea Kospi 2, India Sensex 19, 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) 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 unemployment: call off the search 9 Sep 13 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 Asia: new drivers, new risks the impact of a slower China on regional economies and currencies 2 Aug 13 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 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 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