Daily Breakfast Spread

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1 Economics, Currencies & Rates Daily Breakfast Spread DBS Group Research 4 October 2016 Economics US Fed expectations Implied fed funds rate Sep16 Dec16 Mar17 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 KR: The latest manufacturing data were disappointing. Industrial production fell more than expected by -2.4% (MoM sa) in Aug16, fully offsetting the 1.3% rise in Jul16. Exports contracted -5.8% (YoY) in Sep16 after rising temporarily by 2.6% in Aug16. PMI has also slipped below 50 and stayed there for two consecutive months. The deterioration in manufacturing data coincided with the negative news out of the country in recent weeks, such as the recall of Samsung s products and the bankruptcy of Hanjin shipping. This naturally fueled the concerns about economic slowdown. It should be noted, however, manufacturing only accounts for 30% of the Korean economy. The other key sectors services and construction have remained in good shape. In contrast with the decline in industrial production, services and construction outputs continued to expand at a decent pace in Aug16 (Chart). The earlier round of policy stimulus measures has continued to support domestic demand, as evidenced by the rebound in property market and the pickup in consumer confidence. Judging from the full set of data, we believe that a 2.5% (QoQ saar) growth remains achievable for 3Q16. There is a good chance that the Bank of Korea (BOK) will maintain its full-year GDP forecast at 2.7% during the upcoming quarterly review on 13 Oct. From the perspective of supporting growth, the BOK does not face the pressure to further cut rates. We expect it to hold rates at 1.25% next week. Southeast Asia, India KR: Output indices sa, 2010= Industrial production Services Construction 90 Jan-13 Jan-14 Jan-15 Jan-16 SG: PMIs (Sep16) have offered some respite but don t pop the champagne yet. Latest manufacturing PMI has finally crept up to expansion territory to 50.1, up from 49.8 previously. This is after 14th consecutive months of contraction. However, the seasonally adjusted series shows that this is in fact the second consecutive months of expansion for the overall manufacturing sector (see Chart). Separately, the electronics PMI has recorded the second month of expansion with a reading 50.3, up marginally by 0.1pt. So, is the manufacturing sector finally out of the doldrums? Well, it s still early days in our opinion. Though key sub-indexes such as new orders (including export orders) and production are trending higher, this is accompanied a pick-up in stocks of finished goods. Essentially, manufacturers are merely anticipating 1

2 SG manufacturing PMI Index, 50='neutral' 53.0 PMI mfg PMI mfg, sa Recovery? Latest: Sep Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 stronger demand ahead. That is, this reflects nothing more than just expectation, particularly amid the anticipation of the festive season effects at the end of the year. The pick-up in PMIs is not a surprise and the indexes will likely stay in positive ground for another month or two. That is, the manufacturing production cycle may have bottomed but whether this will eventually materialise into a sustained upward trend is still doubt. Much will depend on global outlook, which is not looking great at the moment. Time will tell but the point to note is that the manufacturing sector is not entirely out of the woods yet. Currencies FX: The DXY (USD) Index appreciated to yesterday from last Friday. The lift came from better-than-expected manufacturing data. ISM manufacturing PMI came in at 51.5 for Sep16, beating the 50.4 consensus. More importantly, it rose above 50 again from 49.4 in Aug16. WTI crude oil, meanwhile, rose to $48.81/barrel yesterday, above its high of $48.52 on 19 Aug. Together, these factors brought the US 10Y bond yield to % on Monday, closing above 1.60% again for the first time since 23 Sep. The DXY index was also supported by weaknesses in its European components. GBP/USD fell to a new post-brexit close of after UK PM Theresa May signaled her intention to invoke Article 50 by March EUR/USD has been struggling to stay above 1.12 after focus turned on the challenges in the German banking sector. EUR accounted for 57.6% of weights in the DXY, while GBP s share was 11.9%. AUD/USD has been trapped between 0.76 and 0.77 since 22 Sep. The new Reserve Bank of Australia (RBA) Governor, Philip Lowe, is likely to keep the cash rate target unchanged at 1.50% during his first monetary policy meeting today. Consensus is still looking for another rate cut because CPI inflation fell to 1% YoY in 2Q16, well below the RBA s 2% target. The Australian bond market is, however, no longer sure if the next move is a cut. The AU 2Y bond yield bottomed at 1.413% on 24 Aug, and has since, risen to 1.547% yesterday. Real GDP growth improved to 3.3% YoY in 2Q16, its highest level since 2Q12. Apart from better growth, the AUD is also underpinned by the recent recovery in the commodity prices. It, however, remains doubtful that the AUD can buck the broader trend of a stronger USD. 2

3 Fixed Income IN: Rising geopolitical tensions between India and Pakistan led to a small bout of volatility across INR assets last week. There was a kneejerk selloff in the stock market, INgov bonds and the INR. However, by Friday, INgov bonds and the INR have already recouped much of their losses. From a fixed income perspective, nothing has changed. We continue to like INgov bonds, noting that they would hold up well even in a Fed normalization cycle. Fundamentally, India s current account deficit has narrowed to just 0.1% of GDP in 2Q, from as wide as 5% in Coupled with easing inflation, the RBI has been able to cut policy rates over the past few quarters. Even as some price pressures are visible, we think that the Reserve Bank of India (RBI) is likely to keep an accommodative stance. Another cut could come as soon as today when the monetary policy panel meets for the first 2Y & 10Y INgov Yields %pa Y INgov Yield 10Y INgov Yield 6.50 Jan-15 Jul-15 Jan-16 Jul-16 time. The divergence in monetary policy outlook from the Fed should lend some support for INgov bonds. Lastly, with the INgov curve still relatively flat, we think shorter-term INgov bonds are more attractive. 3

4 Economic calendar Event Consensus Actual Previous Oct 3 (Mon) TH: CPI (Sep) 0.4% y/y 0.38% y/y 0.29% y/y SG: PMI (Sep) electronics PMI US: ISM mfg (Sep) ID: CPI (Sep) 3.05% y/y 3.07% y/y 2.79% y/y Oct 4 (Tue) KR: Current acc (Aug) USD 5513mn USD mn Oct 5 (Wed) KR: CPI (Sep) 0.7% y/y 0.4% y/y TW: CPI (Sep) 0.3% y/y 0.57% y/y PH: Cpi (Sep) 2.1% y/y 1.8% y/y EZ: composite PMI (Sep, F) US: mortgage application (Sep) -0.7% sa US: ADP employment chg (Sep) 163K 177K US: trade balance (Aug) -USD 39.2bn -USD 39.5bn US: ISM non-mfg (Sep) Oct 6 (Thur) US: initial jobless claims (Oct) 255K 254K Oct 7 (Fri) MY: trade balance (Aug) MYR 6.58bn MYR 1.91bn -- exports -2.0% y/y -5.3% y/y -- imports 2.0% y/y -4.8% y/y TW: trade balance (Sep) USD 3.88bn USD 3.99bn -- exports 2.2% y/y 1.0% y/y -- imports 8.0% y/y -0.8% y/y US: non-farm payrolls (Sep) 170K 151K US: unemployment rate (Sep) 4.9% sa 4.9% sa Central bank policy calendar Policy Date Country Rate Current Consensus DBS Actual This week 4-Oct IN o/n repo 6.50% 6.50% 6.25% Next week 13-Oct KR 7 day repo rate 1.25% Last week 29-Sep TW disc rate 1.375% 1.25% 1.25% 1.375% 4

5 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* Source: CEIC and DBS Research 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 ,983 13,160 13,339 13,518 13,697 Malaysia Philippines Singapore n.a. n.a. n.a. n.a. n.a Thailand Vietnam^ ,305 22,243 22,243 22,243 22,243 China* Hong Kong n.a. n.a. n.a. n.a. n.a Taiwan Korea ,105 1,088 1,090 1,093 1,095 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 23, Taiwan TWSE 9, Korea Kospi 2, India Sensex 27, 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) 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)

7 Recent Research 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 TH: manufacturing gone cold 25 May 16 SGS: bracing for the Fed 24 May 16 Global: Where lies north? 16 May 16 CN: outbound investments intact 5 May 16 JP: perception gap widens 5 May 16 FX: USD down but not out 3 May 16 Rates: Global rates roundup / chart-pack 28 Apr 16 SG: national vs domestic growth 28 Apr 16 IN: investment cycle slows 20 Apr 16 ID: the new policy rate 18 Apr 16 IN: improving liquidity management 15 Apr 16 SGD: slipping into neutral 8 Apr 16 JP: reflation campaign still has a long way to go 8 Apr 16 CN: what are supply-side structural reforms? 7 Apr 16 CN: root causes and remedies for overcapacity 6 Apr 16 US: what is driving core inflation and 31 Mar 16 when will headline follow? EZ: watching Brexit risks 28 Mar 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. 7