Economics Hong Kong chart book HKD rates are sensitive to rising USD rates Group Research 11 October 218 Samuel Tse Economist Please direct distribution queries to Violet Lee +6 6878281 violetleeyh@dbs.com Intensifying Sino-US trade friction and the consequential CNY depreciation have led to market panic in the Hong Kong stock market. The market has started to price-in the rate hike expectation one week before the Fed Fund rate hike and local prime rate hike. Hibor overshot on the last trading day of the month alongside quarter-end effect. Hong Kong dollar thereby bounced back from the weak side of the convertibility undertaking. 1-M Hibor fell back slightly on entering October. The currency hovered at 7.82-7.83 per USD. Charts of the month Hang Seng Index and CNY 32, 31, 31, Hang Seng Index USD/CNH (RHS) 3, 3, 29, 29, 28, 28, 27, 27, 26, 26, 1-Jun 1-Jul 1-Aug 1-Sep 1-Oct 6.3 6.4 6. 6.6 6.7 6.8 6.9 7 Interest rate spread and HKD bps -12-1 -8 Fed Fund rate hike Quarter-end and giant IPO effects Fed Fund rate hike, Prime rate hike USD / HKD 7.81 7.82-6 -4-2 1-M HIBOR-LIBOR spreads HKD spot (RHS) HKMA withdrawal in April and May: HKD7.4bn HKMA withdrawal in August: HKD33.1bn Jan-18 Feb-1 8 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-1 8 Oct-18 7.83 7.84 7.8 Refer to important disclosures at the end of this report.
Hong Kong chart book HKD rates are sensitive to rising USD rates 11 October 218 Consumption Labour market has remained tight Unemployment rate and labour demand-supply % (YOY) % 3. 3. 2. 3.4 2. 3.3 1. 3.2 1.. 3.1. 3. -. Employment Labour force 2.9-1. Unemployment rate (RHS) 2.8 Recovery in inbound tourism has supported retail sales Tourist arrivals, retail sales value and rent % (YOY) % (YOY) 4 Retail shops rental (RHS) 8 3 Visitor arrivals 6 2 Retail sales value 4 1 2-1 -2-2 -4-3 -6 Retail spending has been fuelled by full employment Weak stock market weighs on domestic consumption Retail sales and unemployment % (YOY) 4 % 3. Retail Sales and Hang Seng Index % (YOY) Index 4. Retail sales value 34, 3 2 3.4 3.3 3. 2. Hang Seng Index (RHS) 31, 1 3.2 1. 28, 3.1-1 3. -2 Retail sales volume 2.9-3 Unemployment rate (RHS) 2.8. 2, -1. 22, -2. -3. 19, Oct-14 Oct-1 Oct-16 Oct-17 Oct-18 Page 2
Hong Kong chart book HKD rates are sensitive to rising USD rates 11 October 218 External trade figures Trade has been resilient thus far due to front-loading activities before the US s second round of tariffs on China came into effect Merchandise trade statistics % (YOY, 3mma) 2 HKD bn 2 Trade balance (RHS) 1 Exports 1 1 Imports 1 Recovery in inbound tourism, vibrant trade flow, and buoyant financial activities in 2Q18 have ramped up services exports Exports and imports of services % (YOY) Trade balance HKD bn 8 Exports 8 6 Imports 6 4 4 2 2 - - -2-4 -6-2 -4-6 -1-1 -8-8 Jun-14 Jun-1 Jun-16 Jun-17 Jun-18 Exports of goods by country Export growth to China has already slowed down amid weakening China s domestic demand Exports to China % (YOY, 3mma) Index 2 Exports to China 2. 2 China manufacturing PMI (RHS) 2 1 1-1.. 49. -1 49 Sep-1 Sep-1 6 Sep-1 7 Sep-1 8 1 Exports to the US are set to cool from an escalation in the Sino-US trade war despite favourable PMI figure Exports to the US % (YOY, 3mma) Index 2 Exports to the US 62 1 US composite PMI (RHS) 6 1 - -1 Sep-1 Sep-1 6 Sep-1 7 Sep-1 8 8 6 4 2 Page 3
Hong Kong chart book HKD rates are sensitive to rising USD rates 11 October 218 Property and monetary The correlation between M2 money supply and headline inflation has weakened Inflation and M2 % (YOY) % (YOY). CPI M2 (RHS) 14 4. 4. 12 3. 1 3. 8 2. 2. 6 1. 4 1.. 2. Aug-1 Aug-16 Aug-17 Aug-18 Interbank rates rose due to US Federal Reserve target rate hike and HKMA s intervention; Aggregate balance stayed low at HKD76bn HIBOR and liquidity % HKD bn 2.2 2 2. 23 1.8 21 1.6 19 1.4 17 1.2 1 1. 13.8 11.6 9.4 7 Sep-1 7 Dec-17 Mar-18 Jun-18 Sep-1 8 Aggregate balance (RHS) 1-month HIBOR HKD rebounded somewhat alongside narrowing HIBOR- LIBOR spreads Interest rate spread and HKD bps USD / HKD -12 7.81-1 -8-6 -4-2 7.82 7.83 7.84 7.8 Jan-18 Apr-18 Jul-18 Oct-18 1-M HIBOR-LIBOR spreads HKD spot (RHS) The property market cooled down; The near-term outlook is clouded by the intensifying trade war Property price and interset rate % % (YOY) 3. Property price (RHS) 3 2. 1-M Hibor 2 2. 2 1. 1 1. 1.. -. - -1. -1-1. -1 Page 4
Hong Kong chart book HKD rates are sensitive to rising USD rates 11 October 218 Property and monetary (cont d) HIBOR-LIBOR spreads have narrowed alongside HKMA s interventions HIBOR and LIBOR fixing curves % 3. 3. 2. 2. 1. 1... 1D 1W 1M 21-Dec-17 2M 3M 21-Sep-17 6M 21-Jun-17 21-Mar 12M HKD yield curve USD yield curve Local interest rates are therefore set to rise in the near term Short-term and long-term interest rates % % 2.4 2.8 2.2 2.6 2. 2.4 1.8 1.6 2.2 1.4 2. 1.2 1.8 1. 1.6.8.6 1.4.4 1.2 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 1-month HIBOR 12-month HIBOR (RHS) 3-month HIBOR Worsening affordability precludes risks hitherto; yet, transaction volume dropped amid weakened market sentiment Affordability and loan to value ratio % Property sales transaction volume Units 6 Affordability ratio 9, Loan to value Ratio 6 8, 7, 6, Loan growth to China decelerated alongside the slower growth in the mainland Non-Bank China Exposures HKD bn 7, SOEs Private Non-China entities Others 6,, 4, 4, 4, 3, 3, 2, 1, 4 2, Jun-14 Jun-1 Jun-16 Jun-17 Jun-18 Page
Hong Kong chart book HKD rates are sensitive to rising USD rates 11 October 218 Forecasts on major indicators: GDP CPI inflation 216 217 218f 219f 216 217 218f 219f Growth rate (%, YoY) 2. 3.8 3.3 2.9 2.4 1.7 2. 2. Exchange rate and interest rates forecasts 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 USD/HKD eop 7.8 7.8 7.83 7.8 7.84 7.83 7.82 7.81 Interbank rate 3-M 1.21 2.1 2.28 2.4 2.7 2.9 3.1 3.2 Government bond yields 2Y 1.42 1.9 2.2 2.4 2.6 2.9 3. 3.2 1Y 1.99 2.2 2.47 2.8 2.9 3.1 3.2 3.2 1Y-2Y (bps) 7 34 23 4 3 2 2 Page 6
Hong Kong chart book HKD rates are sensitive to rising USD rates 11 October 218 Group Research Economics & Strategy Taimur Baig, Ph.D. Chief Economist - G3 & Asia +6 6878-948 taimurbaig@dbs.com Nathan Chow Strategist - China & Hong Kong +82 3668-693 nathanchow@dbs.com Masyita Crystallin, Ph.D. Economist Indonesia & Philippines +62 2988-43 masyita@dbs.com Joanne Goh Regional equity strategist +6 6878-233 joannegohsc@dbs.com Neel Gopalakrishnan Credit Strategist +6 6878-272 neelg@dbs.com Eugene Leow Rates Strategist - G3 & Asia +6 6878-2842 eugeneleow@dbs.com Chris Leung Economist - China & Hong Kong +82 3668-694 chrisleung@dbs.com Ma Tieying Economist - Japan, South Korea, & Taiwan +6 6878-248 matieying@dbs.com Radhika Rao Economist - Eurozone & India +6 6878-282 radhikarao@dbs.com Irvin Seah Economist - Singapore, Malaysia, & Vietnam +6 6878-6727 irvinseah@dbs.com Duncan Tan FX & Rates Strategist - ASEAN +6 6878-214 duncantan@dbs.com Samuel Tse Economist - China & Hong Kong +82 3668-694 samueltse@dbs.com Philip Wee FX Strategist - G3 & Asia +6 6878-433 philipwee@dbs.com Sources: Data for all charts and tables are from CEIC, Bloomberg and DBS Group Research (forecasts and transformations). 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 & the particular needs of any specific addressee. The information herein is published for the information of addressees only & 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 & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & 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 & tables are CEIC & Bloomberg unless otherwise specified. DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 18982. Tel: 6-6878-8888. Company Registration No. 196836E. Page 7