Daily Breakfast Spread

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1 Economics, Currencies & Rates Daily Breakfast Spread DBS Group Research 21 November 2016 US Fed expectations Implied fed funds rate Dec16 Mar17 Jun17 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. Monday s The Week Ahead Greater China, Korea TW: A slew of economic data is due this week, including October export orders, industrial production and unemployment rate, as well as the 3Q final GDP. Orders and production data are likely to confirm that the export-driven growth recovery has been sustained in 4Q16. The leading indicators released earlier, including US ISM manufacturing and China/Taiwan PMI, have showed further improvements in Oct16. More attention will be given to the government s review of the annual economic forecasts, which will be published together with the final 3Q16 GDP on Friday. Officials from the National Development Council said last week that the economy would grow 2% in 2017, higher than the 1.88% projected by the Directorate General of Budget, Accounting and Statistics currently. Note that the latest 3Q16 GDP, based on the preliminary estimate (2.06%), was very close to the DGBAS s original forecast (1.99%). If the 2017 growth forecast is lifted to 2%, it would imply an upgrade in the outlook for this and the next four quarters. It will be interesting to see the government s new assessment about the upside and downside risks to the growth outlook ahead. A faster global growth and recovery in the electronics sector should bode well for Taiwan. On the other hand, however, a further slowdown in the Chinese economy and increase in global trade protectionism should be negative. Following the recent US election, concerns about trade protectionism have increased across the Asia region. Tariff/currency disputes between the US and China could hurt Taiwan s exports indirectly. A failure of the TPP could also pose challenges for Taiwan s external trade policy. That said, the immediate impact of the US election, which is mainly reflected in the global financial market volatility, appears to be limited for Taiwan. Thanks to the rapid rise in UST yields, the long-term TGB yields have started to normalize from extremely low levels; but the short-term domestic rates remained largely stable. The Taiwan dollar weakened against the USD, but stayed firm versus the Asia dollar index. Investor sentiment remains calm and financial conditions are still accommodative to support the short-term economic growth outlook. Southeast Asia, India MY: Ringgit is under pressure again. The currency fell by about 4.9% against the USD in November (see Chart). The bulk of the decline came on the back of the US election where market dumped Asian currencies with the expectation that a pro-growth policy promised by new President-Elect, Trump, will imply faster than expected US Fed hikes and stronger USD ahead. Though the ringgit was not alone in this regards but high foreign bond holdings (36%), maturity driven outflows in the bond market, a still fairly weak foreign reserve position and the fact that it was one of the better performing currencies in the first five months of the year have further weighed down on the currency. Plainly, the ringgit is pretty much back to where it was about 12 months ago. Refer to important disclosures at the end of this report. 1

2 MY: Recent pressure on the ringgit MYR/USD 4.50 Back to square one Latest: 18 Nov Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Besides the above fundamental reasons, the slide in the currency was further exacerbated by recent Bank Negara action requesting for foreign banks in Malaysia to comply with the central bank s clamp-down on offshore ringgit trading, a move that the market perceives as a form of capital control. Specifically, letters were sent from onshore banks to their offshore counterparts, requesting for compliance officers to sign commitments to cease trading in the ringgit in the NDF markets and the letters has to be returned to Bank Negara. While Malaysia allows foreigners relatively open access to its domestic bond and stock markets, it prohibits any offshore trading of its currency or related derivatives. Although the move can be merely seen as the authority tightening their enforcement of the regulations, it is expectation that drives the market. Fears of capital controls obviously has added more pressure on the currency. While weaker currency is generally good for export dependent economy, volatile FX swings are not favored by exporters/traders due to high hedging costs. In addition, the weaker ringgit also means that the chance of another rate cut by the central bank is diminishing. Expectation is for BNM to lower the Overnight Policy Rate (OPR) by another 25bps to 2.75% in the policy meeting this week. With ringgit being depressed, the odds for that to happen is not looking good indeed. TH: 3Q16 GDP growth is likely to come in at 3.5% (YoY), keeping overall 2016 growth on track to reach 3.3%. Private sector demand remains sluggish, with investments the overall laggard. We reckon that private investment growth may come in sub-2% again, making it all the more crucial that the government continues to pump-prime the economy going forward. It will be interesting to see how much private consumption has changed in the quarter, but overall private sector growth is unlikely to deviate much from the 2.5-3% range for now. The one encouraging development of late is that trade data has outperformed our expectations in 2H16. Exports grew 5% (YoY) in the two-month period ending September. If this pace were to be sustained, full-year export growth may come in closer to neutral rather than the -2% that we have currently penciled in. We have also seen some signs that import demand might have bottomed out, probably an early indication that the recovery in domestic demand has gained traction in recent months. If this momentum were to be maintained, GDP growth may start surprise to the upside by mid Not like the 3Q GDP data is going to change the Bank of Thailand s (BOT) policy stance though. The central bank understands the need to keep an accommodative stance, in an attempt to push for stronger private investment growth. At the same time, it does seem that things are beginning to look slightly better on the outlook. Another rate cut is not seen to be necessary. Indeed, if not for the central bank s attempt (for the best part of the year) to facilitate a softer currency, the policy rate might be slightly higher than it is. 2

3 IN: Impact of the government s banknote reform (also referred to as demonetization) initiated earlier this month continues to reverberate. To ease short-term strain on residents, withdrawal and usage restrictions are being tweaked, with the situation fairly fluid for now. While the macroeconomic impact will be more visible in the monthly numbers, yet far the fallout has been most visible on rates/ money markets. We touched upon the latter in recent notes. The macro impact on the economy, though with a lag, will be material as over 85% of the cash in circulation, domestically, is in the denominations that were scrapped (see chart). The economy is also highly cash-dependent (13% of GDP vs global average of 2.5-8%; BIS). Impact is thus likely to be material on growth, inflation, fiscal and rates/ liquidity. The scale of impact depends on the duration of the transition period. As scheduled, bulk of the banknote exchange is due to be complete by end-year though banks, with some spillover to Mar17 deadline. If this is on track, GDP growth is likely to weigh on 4Q16 when the measure was imposed and 1Q17 before stabilizing on pent-up demand. Demand for consumer durables and discretionary spending is likely to be hurt in the two quarters, while being negative for cash-dependent business. Rural demand, especially unbanked sections, might moderate as well. This raises downside risks to the tune of 40-80bps to our grossvalue added estimate of 7.6%. The longer-run boost to growth will accrue from a smaller shadow economy and bigger proportion of cashless transactions, assuming also that the other pro-growth reforms stay on track. In addition, the short-term monetary shock is likely to depress demand and consumption thus negative for purchasing power. When combined with tame food prices due to a normal southwest monsoon, FY16/17 inflation might average ~20bps below our 4.8% annual CPI estimate. This, to some extent, offsets the boost from higher public sector wages, leaving the door open for a 25bp cut in 1Q17. Contingent on the inflation outlook, odds for another 25bp cut within 1H17 will gain traction. Scope of a rate cut in Dec16 however is low after the pre-emptive rate cut in Oct and rupee weakness due to external uncertainty. On the fiscal end, windfall tax gains are likely if this initiative is successful in unearthing unaccountable money from the system. This will help to increase the proportion of direct tax revenues over indirect collections. This assumption carries two risks. Firstly, estimates of the extent of shadow/ black money in the economy vary widely. This risks overestimating the potential fiscal boost. Secondly, if this initiative hurts growth sharply, the net boost to tax revenues will be diluted by drop in overall collections. Moreover, a slowdown in the passage of other key reforms including the goods and services tax in the ongoing winter parliament session is being hampered by the banknote reform. Expectations were that the CGST (central GST) and IGST (integrated GST) bills will be passed in the parliament session that runs until mid-dec. State GST bills will be passed by the respective states. In all, the unprecedented nature and scale of the demonetization initiative poses a fair amount of uncertainty over the horizon. Watch this space. IN: Currency denominations in circulation % of total; value basis Coins + Notes upto Rs.10 Rs.20 Rs.50 Rs.100 Rs.500 Rs.1000 IN: Cash in circulation as % of GDP Asia UK/IR Global EU Meast Africa India Source: BIS, DBS 3

4 Currencies CNH: The Shenzhen-Hong Kong Stock Connect is likely to be put off until early December, according to the Chinese media. While reason is unknown, it s been speculated that the continuous decline of the yuan may have led to the delay. Given the trading link will allow mainland investors to trade in 417 Hong Kong stocks, it provides a tempting option for buying overseas assets as a hedge against the weakening currency. Since the yuan s inclusion in the IMF s SDR basket in early-oct, the offshore yuan has fallen 3.4% and touched a record low of against the US dollar. Onshore spot dip to on 18 Nov, erasing gains accumulated after de-pegging from the greenback in The persistent yuan weakness raised the spectre of an exacerbation of capital outflows, with the FX reserves data showing USD45.7 bn left the country last month. The October drop was the fourth in a row, and exceeded the previous three months combined. News of a possible delay of the stock connect disappointed investors who had been betting on a 21 Nov launch and contributed to the weak performance of Hong Kong stocks in early trading. But Charles Li, chief executive of the Hong Kong Exchanges and Clearing, said Friday that the infrastructure to support the cross-border trading platform is in place and final preparations are underway. He also indicated that there is no major disruption to the launch plan and believed the Connect may be launched in a few days. The market eventually shrugged off the negative impact of the delay, with Hang Seng index closed points, or 0.37%, higher. Fixed Income MY: Stresses are showing in the MYR interest rates space. 2Y, 5Y and 10Y MGS yields are now at their highest for the year. Current yield levels are comparable to those seen in 3Q15 when sentiment was buffeted by sharply declining oil prices, worries about the RMB devaluation and domestic political uncertainties. Much of the same mix (strong USD, domestic political concerns) has come into play in recent weeks. Asia FX has been weakening versus the USD since Trump got elected and the MYR is one of the worst hit in the region (down by 4.6% versus the USD this month). Speculative pressure on the MYR directly affects MYR interest rates. While there is no discernable upward pressure on the 3Y, 5Y & 10Y MY Gov Yield 3M Klibor, the 1Y MYR %pa onshore swap rate did edge up by 11bps over 4.50 the past week. Importantly, 4.25 the market no longer anticipates 4.00 further easing by Bank Negara Malaysia 3.75 (BNM). With BNM stepping up rhetoric 3.50 against speculation 3.25 on the MYR, the focus is now firmly on currency stability with growth/inflation dynamics taking a backseat for now Y MYgov Yield 5Y MYgov Yield Y MYgov Yield 2.50 Jan-15 Jul-15 Jan-16 Jul-16 4

5 Economic calendar Event Consensus Actual Previous Nov 21 (Mon) JP: trade balance (Oct) JPY 610bn JPY 496.2bn JPY 498bn -- exports -8.5% y/y -10.3% y/y -6.9% y/y -- imports -16.1% y/y -16.5% y/y -16.3% y/y TH: GDP (3Q) 3.4% y/y 3.5% y/y TW: export orders (Oct) 3.7% y/y 3.9% y/y Nov 22 (Tue) HK: CPI (Oct) 2.7% y/y US: existing home sales (Oct) 5.44MN 5.47MN Nov 23 (Wed) SG: CPI (Oct) -0.2% y/y -0.2% y/y TW: industrial production (Oct) 4.93% y/y 5.02% y/y US: durable goods orders (Oct P) 1.1% -0.3% Nov 24 (Thur) SG: GDP (3Q f) 1.0% y/y 0.6% y/y HK: trade balance (Oct) -HKD 39.7bn -- exports 3.6% y/y -- imports 4.1% y/y Nov 25 (Fri) National CPI (Oct) 0.0% y/y -0.5% y/y MA: CPI (Oct) 1.4% y/y 1.5% y/y SG: industrial production (Oct) 0.5% y/y 6.7% y/y TW: GDP (3Q f) 2.1% y/y 2.06% y/y Central bank policy calendar Policy Date Country Rate Current Consensus DBS Actual This week 23-Nov MY OPR 3.00% 3.00% 3.00% Next week No policy meeting this week Last week 17-Nov ID 7 day rev repo 4.75% 4.75% 4.75% 4.75% 5

6 GDP & inflation forecasts GDP growth, % YoY CPI inflation, % YoY f 2017f f 2017f US Japan Eurozone Indonesia Malaysia Philippines Singapore Thailand Vietnam China Hong Kong Taiwan Korea India* Policy & exchange rate forecasts Policy interest rates, eop Exchange rates, eop current 4Q16 1Q17 2Q17 3Q17 current 4Q16 1Q17 2Q17 3Q17 US Japan Eurozone Indonesia ,428 13,160 13,339 13,518 13,697 Malaysia Philippines Singapore n.a. n.a. n.a. n.a. n.a Thailand Vietnam^ ,493 22,243 22,243 22,243 22,243 China* Hong Kong n.a. n.a. n.a. n.a. n.a Taiwan Korea ,182 1,142 1,145 1,147 1,149 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 2, Japan Topix 1, Eurozone Eurostoxx 3, Indonesia JCI 5, Malaysia KLCI 1, Philippines PCI 7, Singapore Ccy policy FSSTI 2, Thailand SET 1, China S'hai Comp 3, Hong Kong Ccy policy HSI 22, Taiwan TWSE 9, Korea Kospi 1, India Sensex 26, Sources: Data for all charts and tables are from CEIC, Bloomberg and DBS Group Research (forecasts and transformations). 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 (852) 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) Australia DBS Sydney (61 2) China DBS Beijing (86 10) DBS Dongguan (86 769) DBS Guangzhou (86 20) DBS Hangzhou (86 571) DBS Shanghai (86 21) 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) 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) Philippines DBS Manila (63 2) Taiwan 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 (44 207) 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 EZ: ECB challenged by higher bond yields 16 Nov 16 TW: 7 likely outcomes in Nov 16 Global: revenge of the demographic dividend 14 Nov 16 US: structural interest rate compression 2 Nov 16 FX: mid-quarter update 1 Nov 16 SG: down but not out 1 Nov 16 Rates: global rates roundup 31 Oct 16 TW: diversifying into Southeast Asia 21 Oct 16 CN: cyclical bottom 19 Oct 16 IN: assessing current account 18 Oct 16 improvement PHgov bonds: expensive (still) 11 Oct 16 SGD: sticking to neutral 7 Oct 16 EZ: not taper time yet 7 Oct 16 CN: avoiding the Minsky moment 6 Oct 16 IN: monetary policy committee lowers rates 4 Oct 16 Qtrly: Economics-Markets-Strategy 4Q16 15 Sep 16 CNH: SDR inclusion - right time, right place 8 Sep 16 IN: savings rate in need of a boost 2 Sep 16 IDR: towards further resilience 1 Sep 16 SGS: on Fed watch 30 Aug 16 Global growth: redefining strength 26 Aug 16 TW: 5 things you need to know about the 18 Aug 16 aging population SG: risks beneath the GDP figures 18 Aug 16 CN: the risk of keeping status quo 17 Aug 16 CN: why falling private investment growth 12 Aug 16 is a worry ID: tax revenues slipping 11 Aug 16 SG: labour market pain 10 Aug 16 IN: monetary policy in transition 8 Aug 16 FX: DM vs EM - a more balanced story 1 Aug 16 Rates: Global rates roundup / chart-pack 1 Aug 16 IN: hopes high for GST 26 Jul 16 JP: will the helicopters fly? 20 Jul 16 ID rates: steepening risk 18 Jul 16 IN: more consumption-led growth 13 Jul 16 FX: revisions to GBP & JPY 8 Jul 16 TW & KR: how low can rates go? 7 Jul 16 US: a risky mantra 4 Jul 16 PH: Duterte s game plan 4 Jul 16 EZ: dealing with post-brexit blues 30 Jun 16 SG: Brexit impact limited for now 28 Jun 16 Britain s Great Leap Backward 27 Jun 16 Brexit first impact 24 Jun 16 IN: maturing FCNR (B) deposits a molehill, not a mountain 10 Jun16 Qtrly: Economics-Markets-Strategy 3Q16 9 Jun 16 HK: cautious outlook 27 May 16 IN: monitoring external fault lines 25 May 16 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. Sources for all charts and tables are CEIC and Bloomberg unless otherwise specified. DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore Tel: Company Registration No E. 8