Economies, Currencies, Rates Daily Breakfast Spread

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1 Economies, Currencies, Rates Daily Breakfast Spread DBS Group Research 16 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. Greater China, Korea HK: Chief Executive Leung Chun-ying delivered his second Policy Address yesterday. This year, the focus has shifted from increasing land supply to addressing the needs of the poor and the younger generation. This is expected as the government increasingly focuses on tackling socio-demographic issues such as the aging population, labor/talent shortages and the working poor. The newly-introduced Low-income Working Family Allowance is probably the most practical measure and one that benefits the largest number of people (more than low- income families). Annual expenditures are estimated to be around HK$3 billion. Such an allowance kills two birds with one stone it alleviates poverty and encourages people to continue working all the more important as Hong Kong s labor force will shrink soon as baby boomers retire. Meanwhile, further subsidies in the areas of vocational and university education could help Hong Kong nurture and retain youth talent. On the issue of an aging population, the government will double the annual voucher amount on the Elderly Health Care Voucher Pilot Scheme and subsidize colon cancer screening for high risk groups. While such measures seem piecemeal and short term, we are hopeful the government will announce longer term measures to deal with the aging population problem in the upcoming Budget. In particular, we anticipate at least some guidance on how to finance future medical expenses, possibly in the form of a fund in which the government puts aside a proportion of the annual budget surplus to save for the rainy day. Turning to housing, increasing land supply remains high on the government s agenda despite shorter coverage in yesterday s Policy Address. It s just that the bulk of specific long-term measures have already been mentioned last year and there is no need to repeat them again. The bottom line is that the Chief Executive has affirmed plans to ensure a total of 470,000 units are supplied in the coming ten years, with public housing accounting for 60%. As for economic policies, the government will continue to promote the development of our financial services industry through the Financial Services Development Council, which was first introduced in last year s Address. However, the actual speed and scope of development in Hong Kong will largely hinge on the mainland s financial development. Meanwhile, the government s decision to further develop Lantau Island is encouraging. If successful, it will instill vibrancy in the tourism sector, provide Hong Kong with a metropolis which hosts new office space (direly needed), hotels, employment opportunities and housing development projects. To conclude, while this Policy Address seems fairly balanced, a full assessment of the government s plans for Hong Kong can only be made after the Budget is announced next month. Hopefully, it will offer concrete solutions on the pressing issue of population aging. Southeast Asia, India SG: Expect a seasonal rebound in December non-oil domestic export (NODX) figure due tomorrow morning. Headline NODX is likely to recover to 3.1% YoY, up from a plunge of 8.8% in the previous month. Sequential change will probably report a 3-4% MoM sa expansion, which contrasts sharply with the massive 9.3% fall in November. 1

2 The dip in November NODX in our opinion is mainly due to two factors: a moderation in post-christmas season demand and an industry specific downswing in the biomedical cluster. While there is a fair chance that both factors may have persisted into December, demand for electronics components may also pick up in the month, ahead of a forthcoming Chinese New Year lull. It s seasonal effect at full swing. Plants in China will typical ramp up their production ahead of the New Year holiday when production will stop completely for about 2 weeks thereafter. Hence, orders for components from local manufacturers have a tendency to spike up before the festive season so as to cater to the rise in production. This will be the main reason for the upside blip in December NODX on top of the fact that global economic conditions are generally improving. TH: As the Bangkok shutdown continues, it is increasingly likely that the February 2 election will be postponed. Several local media reported that there are now plans to postpone the polls to May. It remains uncertain what authority the caretaker government has regarding the 2014 budget. What seems clear though is the fact that there will be further delays to the THB 2tn infrastructure bill. This does not bode well for the economy. While export growth has shown early signs of bottoming out, domestic demand remains soft. Capacity utilization has slipped again after the slight recovery in September while private investment index is currently at its lowest since 1Q12. The infrastructure bill was eagerly awaited as a catalyst to spur private investment. Against this backdrop, there is a risk that the central bank may feel the need to do more to help propping up the economy. A still benign inflation will continue to make it tempting to call for lower interest rates. This is where things get very tricky for the BOT. Inflation is set to pick up in 2Q and, more TH: falling capacity utilization a key concern importantly, excessive index, sa, 2000=100 %, sa household leverage remains an underlying threat even if the BOT seems to have shrugged this off in the last policy meeting Just like anyone else, the BOT will continue to watch developments on the political front very closely. It will be hardly surprising if the central bank were to remain somewhat bearish during its policy meeting next week Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 private investment index capacity utilization (RHS) IN: Dec WPI posted a pleasant downside surprise yesterday. The inflation gauge slowed at a much faster than-anticipated pace to 6.1% YoY (consensus 7%) from 7.5%. This pullback was almost entirely driven by downward correction in the primary articles index, bulk of which was on account of retreat in vegetable prices. The primary articles index slowed to 10.8% from average 15% in the prior three months, weighed by 13.7% rise in the food price index (vs 19% between Sep- Nov). The main element that had pushed inflation higher in recent months, i.e. vegetable prices softened to 57% (vs 88% Sep-Nov13). Trends from the Agriministry data had shown 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. The heavily-weighted manufacturing price index slowed at a touch, while the fuel index was flat at 11%. Core WPI (non-food manufacturing used as a proxy)

3 inched up a notch, but still remained below 3% mark. The Oct WPI meanwhile was adjusted up to 7.2% from 7% earlier. Much interest is on what this outcome means for policy direction. With the marked correction in the CPI and WPI inflation indices under their belt, the central bank has its pre-conditions fulfilled ahead of the Jan meeting. This increases the odds for the benchmark rate to be held unchanged at the next review. We also revisit our call for a 25bp hike pencilled in for the Mar quarter. Looking ahead, a pause in the rate cycle does not imply rate cuts will be back on the table, despite sagging growth. Few factors call for attention - A) policymakers will need to ascertain that the easing inflation sustains over the next few months. B) even as urban spending stays below-par on the weak industrial sector, rural demand has displayed strength. C) the pullback in price pressures in Dec was not uniform and heavily concentrated in the primary articles index, while manufacturing/ fuel gauges flatlined and core ticked up. In this regard, impact of regular increases in the retail fuel prices, hike in the non-subsidised LPG costs and higher coal/ utilities, call for attention. D) at the same time, the headline WPI reading might be revised up in a couple of months, thus yesterday s release might have overstated the pace of the pullback. In short, an aheadof-the-curve rate cut risks diluting the anti-inflationary stance of the central bank, thus warranting an extension of the pause-and-watch stance over the next few months. Fixed Income IN: Food, fuel indices stabilise =100, Index Latest : Dec Jan-08 Apr-09 Jul-10 Oct-11 Jan-13 WPI Food- Prim WPI Fuel WPI US: USD swap spreads (defined as USD swap rates less UST yields of similar tenor) are low by historical standards. Under non-stress financial market conditions, USD swap rates trade at a positive spread over UST yields, reflecting counter- 2Y USD Swap Spread bps Y average 0 Jan-11 Jan-12 Jan-13 Jan-14 5Y USD Swap Spread bps Y average 0 Jan-11 Jan-12 Jan-13 Jan-14 3

4 party risk premium for swaps (UST are viewed to be risk free). However, when counterparty risk becomes dominant during the global financial crisis in 2008/09 and during the Eurozone crisis, swap spreads have a tendency to widen. Current compressed spread levels could imply low levels of concern about potential stress in the financial markets as US banks rebuild their balance sheets. Demand and supply conditions in the swap space also play a role in explaining the swap spread. In 2013, the swap spread was most elevated in late May (when the bond market started to selloff), but narrowed in the subsequent few months. To this end, when there is greater demand to pay fixed rates, there would on balance be greater upward pressure on swap spreads. As such, USD swap rates do not appear expensive compared to UST yields. When interest rate risks come to the fore again as the Fed continues to withdraw monetary stimulus, there is scope for USD swap spreads to widen. 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 0.1% m/m sa -3.2% m/m sa US: PPI (Dec) 1.1% y/y 1.2% y/y 0.7% y/y PH: overseas remittances (Nov) 8.0% y/y 7.5% y/y 7.0% y/y IN: WPI (Dec) 7.0% y/y 6.2% y/y 7.5% y/y Jan 16 (Thu) JP: machine orders (Nov) 1.1% m/m sa 9.3% 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 Policy interest rates, eop Exchange rates, eop current 1Q14 2Q14 3Q14 4Q14 current 1Q14 2Q14 3Q14 4Q14 US Japan Eurozone Indonesia ,085 11,500 11,500 11,500 11,500 Malaysia Philippines Singapore n.a. n.a. n.a. n.a. n.a Thailand Vietnam^ ,090 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 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 5, Singapore Ccy policy FSSTI 3, Thailand SET 1, China S'hai Comp 2,023 - 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 JP: Has Abenomics impacted the rest of Asia? 15 Jan 14 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 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