Economies, Currencies, Rates Daily Breakfast Spread

Transcription

1 Economies, Currencies, Rates Daily Breakfast Spread DBS Group Research 15 January 2014 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. Southeast Asia, India ID: Last week, BI commented that current account deficit may narrow to below 3% of GDP in 2014 from a projected 3.4% of GDP in There is a good chance for this to materialize. The November trade balance released earlier this month has surprised to the upside, with surplus recorded at USD 780mn, highest since March Excluding oil & gas, trade surplus has improved to USD 2bn, highest since August ID: non oil&gas trade surplus highest since Aug11 USD bn Latest: Nov oil&gas non oil&gas Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Part of the improvement in the trade balance has been caused by further moderation in import growth, which registered a double-digit decline for the first time since late Yet, encouragingly, we are also starting to see signs that the worst maybe over for export growth. On sequential terms, both total volume and value of exports have been gaining grounds since 3Q13. A relatively weak rupiah and a somewhat stronger global economy are likely to bolster export growth going forward. Additionally, there is the recently announced relaxation of mineral export bans. The government has decided to allow exports of copper, iron ores, lead, zinc and manganese concentrates until 2017 while keeping the bans on exports of nickel and bauxite. As it is, the current export ban means a projected fall of export earnings of about USD 2bn in value for the year, lower than the projected USD 5.5bn if the original full list were to go ahead. A narrowing current account deficit is positive for market sentiment. This in turn allows the central bank to play a balancing role in containing market pressure on the rupiah while ensuring that monetary policy will not be overly restrictive for GDP growth. While BI has suggested that it will keep to a tight policy bias, this does not necessarily mean higher interest rates as long as the rupiah remains supported going forward. SG: COE premiums are set to rise and so will inflation. The Land Transport Authority has announced some minor tweaking in the allocation period of the COE to a three-month system, from six-monthly previously. This is to address a sharp fall in supply of COEs that will be issued in the coming months. Even with this revision in policy, average monthly COE quota will still fall by about 12.3% between Feb-Apr14, compared to the period Aug13-Jan14. This makes for further increase in premiums, which is currently hanging around the SGD 70-80K range (exclude motorcycle). 1

2 In fact, we reckon that premiums will continue to stay at around this level as policymakers are determined to reduce the traffic congestion problem and to encourage the commuters to switch to public transport. In this regards, the Monetary Authority has already introduced some drastic tightening in car loans early last year to cool demand for private vehicles. That caused a sharp correction in premiums between Apr-Aug but by Sept, premiums were rising again. The policy direction has been set and is unlikely to change in the near term. Hence, high COE premium is here to stay for a long while unless demand moderates somehow. Otherwise, the pass-through effect on inflation will imply significantly higher inflation in the coming months. Our assessment is that inflation will rise again from April onwards when the base effect from the earlier tightening wears off. We maintain our view that inflation will zoom pass the 3% mark and approach the 4% level by April. Full year inflation will average 3.0% compared to 2.4% in IN: The Dec WPI inflation is due for release today and after the notable pullback in the CPI earlier this week, markets are primed for a downside surprise in this account. Dec CPI inflation slowed to 9.9% YoY, down from revised Nov s 11.6% and back to the underlying trend. The downward correction was more significant in the urban areas at 9.1% - weakest pace in over twenty months, whilst the rural consumers index was slightly weaker. On the WPI, our estimate is for 7.1% YoY, from 7.5% the month before. Easing vegetable prices should provide a reprieve to the food price index, after the component rose 19% between Aug-Nov, doubling from 9.9% in FY12/13. Trends from the Agri-ministry data show that prices of commonly used vegetables, especially onions fell by over 50% on the month in Dec, following the arrival of the winter crop and stepped up supplies. In the meantime, the central bank had also raised concerns that the price pressures runs the risk of becoming generalised. Hence attention also needs to be paid to the trends in the non-food components mainly manufacturing, fuel and core (non-food manufacturing used as a proxy) indices, which have ticked up in the past couple of months. Rupee stability has also been a positive for the inflation outlook. On a related note, the RBI lifted the restrictions on rebooking and cancellation of FX forward contracts earlier this week. With the currency displaying relative resilience to the US QE tapering worries and measures to buoy the capital account to address the current account financing worries, the central bank has the leeway to allow more flexibility in hedging rules. As these were imposed to restrict suspected speculative bets against the currency, the relaxation reflects the policymakers confidence that the currency markets can handle intermittent bouts of volatility. Back to inflation, if the actual WPI inflation is close to our estimate or registers a downside surprise, the odds for a no-action at the RBI s Jan policy review is high. However it would be premature to assume that the central bank will switch gears to an accommodative policy bias amid elevated inflationary expectations and strength in rural wages. These factors along with gradual adjustments in fuel/utilities/ coal prices are likely to keep WPI inflation from easing significantly beyond the 6.5% mark. We will delve on this aspect in our forthcoming market focus piece. G3 US: Good is good again, when it comes to data and markets, at least on the surface. After several lousy data reports the service sector ISM, auto sales and nonfarm payrolls equity markets sagged noticeably, in spite of whispers that the Fed might be inclined to taper the taper. And, going in the other direction, yesterday s retail sales were considerably stronger than expected and markets rebounded smartly. Well, maybe not so smartly. Headline sales growth in December (0.2% MoM, sa) beat consensus by a tenth of a point. But Oct and Nov were revised down by three tenths. Net, net: a two-tenth loss compared to expectations and a one-tenth loss in absolute levels. Ex-autos? They jumped by 7 tenths, beating consensus by three. But Oct and Nov were revised down by four tenths, so these sales underperformed consensus too. 2

3 US - retail sales growth % YoY Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Forget consensus what about growth itself? Is it strong or weak? It s all relative, we suppose. Headline sales growth is now running at 4.1% whether measured in on-year terms or quarter-on-quarter terms. That s a half point less than the 4.6% YoY it was running at back in September when the Fed didn t taper and 1.5 points lower than it was in QoQ terms. So December sales growth underperformed consensus and it s slower than it was back in September when the Fed didn t taper. And markets rally by 1.1% (SPX) to 1.7% (Nasdaq). Someone s feeling cheery. Currencies FX: The US dollar recovered some lost ground amidst higher US long bond yields. Although US 10Y bond yield recovered to % from % on Monday, it remained below the % level when the Fed first tapered asset purchases. Fed officials reiterated that they will proceed with winding down asset purchases but were in no hurry to hike rates. As expected, Fed officials have dismissed last Friday s disappointing nonfarm payrolls. Supporting incoming Fed Chairperson Janet Yellen s prediction for the US economy to grow 3% in 2014, Fed officials signaled that the Fed will continue the path to taper, even if stock markets corrected downwards. Instead of worrying about nonfarm payrolls dipping below 100K, Fed officials appeared more concerned about the fall in the unemployment rate to 6.7%. Essentially, Fed officials felt the urgency to step up communication that short-term interest rates will stay low even if the jobless rate falls below the Fed s 6.5% target. On its dual mandate, the Fed is also more uncomfortable that inflation has been well below its 2% target. Hence, pay attention to today s PPI and tomorrow s CPI data. St Louis Fed President James Bullard suggested if inflation continued to head lower, he would hesitate to continue the taper. By and large, the above comments suggested US 10Y bond yields will not rise above 3% or fall below 2.5% anytime soon. The same tug-o-war is likely to be felt in currency markets which would eventually return to carry trades again. Fixed Income CN: There is scope for the 2Y/5Y segment of the CNY swap to steepen as the People s Bank of China (PBoC) strikes a balance between inflation and ensuring that there is sufficient liquidity in the financial market. Over the course of the past year, engineered liquidity squeezes have become more common as the PBoC maintains a hawkish stance amid rising property prices. As a result, signifi- 3

4 1Y Swap Rate less 7D Repo Rate bps Y CNY Swap - 7D Repo (rhs) -800 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 2Y/5Y Curve in swaps bps Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 cant risk premium has been priced into the front end of CNY swap rates with 1Y CNY swap rate around 100bps higher than the 7-day repo rate (which serves as the floating leg fixing of CNY swaps). By contrast, there was a tendency for the spread to be negative as the market viewed liquidity squeezes to be short-term developments. Elevated risk premium in the front-end of the CNY swap curve has resulted in a flat swap curve over the past few quarters. However, we suspect that curve steepening in 2Y/5Y segment of the swap curve, led by a decline in risk premium in front-end swap rates is likely. Meanwhile, expectations of rising short-term interest rates (as China liberalizes its financial market) should keep rates in the intermediate segment of the swap curve elevated. 4

5 Economic calendar Event Consensus Actual Previous Jan 13 (Mon) IN: CPI (Dec) 10.1% y/y 9.9% y/y 11.2% y/y Jan 14 (Tue) US: monthly budget statement (Dec) USD 44.0bn USD 53.2bn -USD 135.2bn JP: current account (Nov) -JPY 368.9bn -JPY 592.8bn -JPY 127.9bn EZ: industrial production (Nov) 1.4% m/m sa 1.8% m/m sa -0.8% m/m sa US: retail sales (Dec) 0.1% m/m sa 0.2% m/m sa 0.4% m/m sa Jan 15 (Wed) KR: jobless rate (Dec) 2.9% sa 3.0% sa 2.9% sa SG: retail sales (Nov) 0.5% m/m sa -3.2% m/m sa US: PPI (Dec) 1.1% y/y 0.7% y/y PH: overseas remittances (Nov) 8.0% y/y 7.0% y/y IN: WPI (Dec) 7.0% y/y 7.5% y/y Jan 16 (Thu) JP: machine orders (Nov) 1.2% m/m sa 0.6% m/m sa EZ: CPI (Dec) 0.8% y/y 0.9% y/y US: CPI (Dec) 1.5% y/y 1.2% y/y US: initial jobless claims (Jan 11) 328K 330K Jan 17 (Fri) SG: non-oil domestic exports (Dec) 1.0% y/y -8.8% y/y US: housing starts (Dec) -9.3% m/m sa 22.7% m/m sa US: industrial production (Dec) 0.3% m/m sa 1.1% m/m sa Central bank policy calendar Policy Date Country Rate Current Consensus DBS Actual This week 16-Jan 16-Jan US EZ Fed releases Beige Book Report ECB publishes monthly report Next week 22-Jan TH 1 day repo 2.25% 2.25% 22-Jan JP 2014 base money target JPY 270trn JPY 270trn Last week 09-Jan KR 7 day repo rate 2.50% 2.50% 2.50% 2.50% 09-Jan EZ 7-day refi rate 0.25% 0.25% 0.25% 0.25% 09-Jan ID o/n reference rate 7.50% 7.50% 7.50% 7.50% 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 Market prices Policy interest rates, eop Exchange rates, eop current 1Q14 2Q14 3Q14 4Q14 current 1Q14 2Q14 3Q14 4Q14 US Japan Eurozone Indonesia ,050 11,500 11,500 11,500 11,500 Malaysia Philippines Singapore n.a. n.a. n.a. n.a. n.a Thailand Vietnam^ ,082 21,340 21,380 21,410 21,450 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 5, Singapore Ccy policy FSSTI 3, Thailand SET 1, China S'hai Comp 2,027 - Hong Kong Ccy policy HSI 22, Taiwan TWSE 8, Korea Kospi 1, India Sensex 21, 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 (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) 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 Asia: Who s consuming? 13 Jan 14 Qtrly: Economics-Markets-Strategy 1Q14 12 Dec 13 KR: KRW it only gets stronger 22 Nov 13 IN: Caught in fiscal cross-currents 18 Nov 13 TW: Is Shanghai s FTZ a threat or 14 Nov 13 opportunity? CN: Gauging the likelihood of reform success 14 Nov 13 following the Third Plenary US: Bipolar disorder 11 Nov 13 ID: 6% growth in 2014 still on the cards 7 Nov 13 US Fed Nixon goes to China 4 Nov 13 Asia: The best thing about the outlook... 4 Nov 13 US Fed: Landlord to 8 million 28 Oct 13 CNH: Lifting the offshore conversion cap 25 Oct 13 CN: What is TPP and why does in matter? 23 Oct 13 US: Oct 13 IN: Current account woes to take a breather 18 Oct 13 MY: Towards fiscal reform 16 Oct 13 CN-US: Renminbi-izing the dollar 14 Oct 13 Asia cyclical dashboard: Better on the margin? 11 Oct 13 ID: BI and the new normal 9 Oct 13 IN: Room for front-end OIS rates to go lower 8 Oct 13 JP: Growth risk reduced, fiscal risk remains 4 Oct 13 CNH: Onshore deregulation, offshore 30 Sep 13 expansion India rates: Higher but not by much 26 Sep 13 CN: Shanghai Free Trade Zone & the 26 Sep 13 reinvigoration of China 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 CN: 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 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