Asia Morning Bites

Markets show cautious recovery after US CPI-induced rout - eye's on the BoJ as its verbal intervention looks increasingly desperate

Min Joo Kang

Senior Economist, South Korea and Japan

Nicholas Mapa

Senior Economist, Philippines

In this article

Macro outlook What to look out for: China activity data

Macro outlook

Global Markets: The steer from yesterday’s equity futures proved an accurate one, and US equities made small gains yesterday. The S&P500 rose 0.34%, and the NASDAQ rose 0.74%. A further modest recovery is indicated today. Short-dated US Treasury yields continue to rise though, with the yield on the 2Y Treasury rising 3.2bp to 3.788%. 10Y yields were broadly unchanged at 3.40%. EURUSD hasn’t moved much since yesterday and is at 0.9983 currently. The AUD has traded in a very similar pattern, and remains at 0.6757. GBP has shown a bit more life and has recovered to 1.1546, while the JPY has managed to make some decent gains to 142.83, after the BoJ “rate check” yesterday (see more below), though few expect this JPY strength to continue unless there is some real change in the underlying policy stance. The BoJ is running out of “verbal” tools to check the yen’s slide without such changes. The rest of the Asia pack yesterday was broadly weaker, but much less so than a pure catch-up with the G-10 currencies would have suggested. Better fundamentals (lower inflation for one) and some background intervention are helping smooth the volatility in Asian currency markets for now. The KRW was the day’s worst performer, as is often the case in a weak market. USDKRW is now 1391.
G-7 Macro: Yesterday’s US PPI figures showed some moderation in both core and headline PPI inflation, though the core numbers did not fall as much as had been forecast. The UK also saw inflation dip below 10%, but core inflation continued to rise, so this is probably going to be a short-lived dip. Eurozone trade data could be another excuse for EUR weakness. The trade deficit is forecast to widen further to EUR32bn (July figures). The US publishes August industrial production this evening. It is expected to make no progress following last month’s 0.6%MoM increase.
Australia: August labour market data are out later this morning (0930 SGT). The forecast employment change (+35,000) looks a bit low to us given the widespread labour shortages reported. This is an important report for the RBA, which has indicated that it may be prepared to slow the pace of its rate hikes if data permits. Participation rates and the unemployment rate complete the overall picture for employment today.
China: While the PBoC seems to be trying to slow the pace of CNY decline, we don’t believe there is much likelihood that they will consider any further cuts to the 1Y Medium Term Lending Facility (1Y MLF) today. The current rate is 2.75%, down from 2.85% when it was lowered last month.
Japan: The Bank of Japan’s “rate check” appears to have been effective in protecting a ceiling of USDJPY145. This should stabilize the currency, at least temporarily . The market is now slowly digesting the Fed’s next giant step at its September meeting. The rate-checking and intensified verbal intervention by the authorities will likely have a greater impact on market expectations about the possibility of intervention. But we still think that the probability of actual intervention is low because unless the BoJ's monetary policy changes, it is doubtful that intervention will work. We think the market will try to breach the ceiling of 145 again as yield differentials will likely widen further with more aggressive Fed hikes (the market is pricing in a terminal Fed funds rate of 4.25%).
South Korea: The Bank of Korea expressed a hawkish stance on future policy direction In the minutes of the August MPC meeting, saying that it would like to continue its hiking cycle until early next year. There was a minority opinion that the pace of rate hikes should be adjusted as downside risks to growth emerged. However, considering the general hawkish stance of the MPC, including Governor Rhee, it seems likely that the BoK will continue hiking until the early next year. In addition, Ms. Seo Young-Kyung, a hawkish member, said at an event that “a more active policy response is needed to respond to the inflationary pressure caused by the weak KRW.” We believe that the BoK continues to communicate to the market its intention to raise interest rates further by next year. However, as we expect growth to slow sharply by the end of the year, it is questionable whether the BoK will be able to maintain this stance in the face of a sharp slowdown in growth.
Indonesia: August trade data is set for release today. Both exports and imports are expected to post double digit gains with the overall balance likely in surplus. Exports have benefited from elevated commodity prices while imports are likely to grow by more than 30%YoY as the pace of economic growth picks up. The IDR has remained relatively more resilient this year as its favorable trade balance keeps the current account in surplus. A relatively stable IDR and lower inflation than most of its peers has limited the pressure on the central bank to hike rate aggressively so far in 2022. Bank Indonesia will likely sustain its measured pace of rate hikes but they could accelerate tightening should the IDR come under more intense depreciation pressure.

What to look out for: China activity data

Japan trade balance (15 September)
Indonesia trade balance (15 September)
Australia labour market data (15 September)
US initial jobless claims and retail sales (15 September)
South Korea unemployment (16 September)
Singapore NODX (16 September)
China industrial production, retail sales and fixed asset (16 September)
US University of Michigan expectations (16 September)

Authors

Min Joo Kang

Senior Economist, South Korea and Japan

Nicholas Mapa

Senior Economist, Philippines

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