Economies, Currencies, Rates Daily Breakfast Spread

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1 Economies, Currencies, Rates Daily Breakfast Spread DBS Group Research 6 December 2013 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 MY: Trade data for Oct13 due today should see further improvement on the external front. Headline export growth is expected to register 6.4% YoY, up from 5.6% in the previous month. Import growth is likely to register 8.8%, which should thus deliver a trade surplus of MYR 8.9bn. External outlook is improving. Policy stimulus has lifted economic performance in Japan while Europe is out of recession. The US is still on the recovery path, albeit a slow one. Most importantly, the China engine is kicking dust MY: PMIs have picked up again, which should lift Index overall regional outlook. 58 Singapore EZ Indeed, PMI s of key markets have been rising as manufacturers are anticipating stronger demand ahead as economic conditions continue to improve (see Chart). This will bode well for Malaysia s export performance as well as for the trade account. Expect overall trade surplus grind gradually northward, barring upside risk in imports China 46 Latest: Oct13 44 Jan-12 Jul-12 Jan-13 Jul-13 TH/PH: CPI inflation in both Thailand and Philippines have ticked up higher in November. In Thailand, CPI inflation jumped to 1.9% YoY from 1.5% previously. The Philippines, meanwhile, saw CPI inflation inching higher to 3.3% YoY, its highest since February. Core inflation in both economies have also ticked up higher, suggesting inflationary pressures are building up as 2014 approaches. Yet, these are unlikely to affect monetary policy stance for now. Growth concerns have returned to dominate monetary policy setting in recent weeks. This is clearly evident for the BOT after the surprise rate cut earlier this month. The slump in private consumption growth is a key concern to grapple with at this juncture, especially given the on-going political tension. In the Philippines, the BSP is likely to wait for a more thorough assessment of the typhoon damages. Recent rhetoric from the BSP suggests little need for extra monetary stimulus at this point. The government has just allocated USD 900mn for the initial reconstruction plan and has supposedly set aside an additional USD 1.5bn in extra budget. The overall macro risk profile of the economy is likely to remain supportive of financing needs for now. US 1

2 Looking ahead, CPI inflation may return closer to the medium-term trend in 2014, which means about 3-3.5% YoY in Thailand and about 4.5-5% YoY in the Philippines. Some monetary tightening is still likely next year but watch GDP growth momentum in early G3 US: All eyes are on today s nonfarm payrolls. Consensus expects 185k jobs were created in November, mostly, it seems, because last month s outcome was 204k. But imagine you ve gone to Mars, summoned by the King. Payrolls there are also being announced today, and the King wants to know what the outcome will be. You don t know what Martian payrolls were in October. All you know is: 1) consumption the driver of all things has a grown at 1.7% rate for the past year; 2) core consumption the more reliable / dependable part has grown at a 1.1% rate for the past year; 3) business investment has grown at a 1.2% rate for three quarters; 4) core capital goods shipments haven t grown at all in 18 months; 5) industrial production has grown at a 1.2% rate for nine months; 6) import demand everything Mars buys from the rest of the universe hasn t grown by a penny in 18 months; 7) labor force participation has fallen steadily for five years to a 36 year low; and 8) the central bank s favoured inflation gauge is showing 1.2% YoY, barely half the target. What s your best guess for the King? Payrolls should be 75k, 100k tops. Then he pops a bigger question. What will the central bank will do in December? Will it taper QE3? Or will it introduce QE4? Piece of cake, you reply, QE4. Yea, that was too easy, admits the King. Oh well, have a good flight home. JP: The 3Q GDP (final estimate) will be released next Monday morning. Growth is expected to be very close to the preliminary estimate of 1.9% QoQ saar. The private consumption and capital spending indices released in recent weeks basically matched the initial estimates in the 3Q GDP. The economy performed well this year, benefiting from a weaker yen, a higher stock market, increases in public spending, and recovery in confidence. Going forward, a main challenge facing the economy will be the hike of the consumption tax in April The consumer, housing and construction sectors would be hit hard, according to the historical experiences in In order to cushion the impact from the tax increase, the cabinet approved a stimulus package yesterday, with the headline value reported to be JPY 18.6trn. Whether this can fully offset the drag from the tax hike remains doubtful, however. Excluding the special loans and others, government spending contained in the package amounts to only JPY 5.5trn (1% of GDP). This is not too different from the size of stimulus pledged in October following the announcement of consumption tax hike. Meanwhile, it is opaque how much of the money will be fresh expenditures. The items such as post-earthquake reconstruction spending may have been covered by the existing budgets. As the effects of a JPY 5trn stimulus has already been factored into our forecast, we keep the 2014 GDP estimate unchanged at 1.4% (vs. 1.8% for 2013). EZ: The ECB left the main refinance and deposit facility rate unchanged at 0.25% and 0% respectively. This was along expected lines, as policymakers remain keen to retain headroom to stimulate the economy, especially as the policy rate nears the zero-bound territory. The Governing Council s assessment of the economic conditions was not vastly different from the Nov commentary. It was acknowl- 2

3 edged that the Euroarea was likely to experience a prolonged period of low inflation followed by a gradual climb towards, but kept lower than 2% target. But the officials drew comfort from the well-anchored inflationary expectations, stripping off the volatile food and fuel elements. Recovery in growth is also expected to follow-through at a slow pace, into the next two years. These views were reflected in the revisions in the EZ: Inflation vs rates YoY Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Main refinancing rate Inflation quarterly staff projections inflation estimate was lowered by 0.1% to 1.4% and down by 0.2% to 1.1% in 2014, before inching up to 1.3% in For growth, the projection for 2013 was left unchanged at -0.4%, at 1.1% in 2014 and 1.5% in Despite targeted questions at the other non-policy tools that were being considered, ECB chief Draghi was non-committal on specific measures. But he did highlight that the upcoming banks asset quality review was expected to improve the transmission of policy shifts into the real sector. Various alternate measures played up by the prominent ECB members was primarily intended to signal and assure that options were on hand to deal with pockets of economic stress, as and when required. The currency was also not highlighted as a risk and as our inhouse FX Strategist highlighted in his note yesterday that the policy preference was possibly for a stable EUR. Despite recent cuts, the Eurozone s rates are still higher than US and Japan. In addition, in contrast to balance sheet expansion measures undertaken by the US Fed and Japan s BOJ, the ECB s balance sheet has been contracting on liquidity repayments. These two factors have been major support factors for the common currency. 3

4 Economic calendar Event Consensus Actual Previous Dec 2 (Mon) KR: CPI (Nov) 1.0% y/y 0.9% y/y 0.7% y/y JP: capital spending (3Q) 3.6% y/y 1.5% y/y 0.0% y/y CN: PMI-manufg (Nov) ID: CPI (Nov) 8.45% y/y 8.37% y/y 8.32% y/y ID: trade balance (Oct) -USD 775mn USD 42mn -USD 657mn TH: CPI (Nov) 1.82% y/y 1.92% y/y 1.46% y/y EZ: PMI-manufg (Nov F) US: ISM Manufg (Nov) Dec 3 (Tue) SG: PMI (Nov) Dec 4 (Wed) EZ: PMI - services (Nov F) EZ: GDP (3Q P) -0.4% y/y -0.4% y/y -0.4% y/y EZ: retail sales (Oct) 1.0% y/y -0.1% y/y 0.3% y/y US: ADP emplyt change (Nov) 170K 215K 130K US: trade balance (Oct) -USD 40.0bn -USD 40.6bn -USD 41.8bn US: new home sales (Sep-Oct) 429K 444K Dec 5 (Thu) KR: GDP (3Q F) 3.3% y/y 3.3% y/y TW: CPI (Nov) 1.00% y/y 0.67% y/y 0.64% y/y TW: WPI (Nov) -0.94% y/y -0.95% y/y -1.57% y/y PH: CPI (Nov) 3.5% y/y 3.3% y/y 2.9% y/y US: GDP (saar - 3Q S) 3.1% q/q 3.6% q/q 2.8% q/q US: factory orders (Oct) -1.0% y/y -0.9% y/y 1.7% y/y Dec 6 (Fri) MY: trade balance (Oct) USD 9.10bn USD 8.66bn -- exports 6.1% y/y 5.6% y/y -- imports 6.8% y/y 2.8% y/y US: chg in non farm payrolls (Nov) 185K 204K US: unemployment rate (Nov) 7.2% 7.3% Central bank policy calendar Policy Date Country Rate Current Consensus DBS Actual This week 05-Dec EZ 7-day refi rate 0.25% 0.25% 0.25% 0.25% Next week 12-Dec KR 7 day repo rate 2.50% 2.50% 12-Dec PH o/n rev repo 3.50% 3.50% 12-Dec ID o/n reference rate 7.50% 7.50% Last week 27-Nov TH 1 day repo 2.50% 2.50% 2.50% 2.25% 4

5 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 4Q13 1Q14 2Q14 3Q14 current 4Q13 1Q14 2Q14 3Q14 US Japan Eurozone Indonesia ,986 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 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 2,252 - Hong Kong Ccy policy HSI 23, Taiwan TWSE 8, Korea Kospi 1, India Sensex 20, Source: Bloomberg 5

6 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)

7 Recent Research 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 Asia property: How high the moon? 4 Jun 13 CN: Sino-South Korean economic 29 May 13 relationship 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