Asia week ahead: Are we at the end of it?

First of all, let’s hope for no more escalation of the US-China trade rhetoric over the coming weekend even as a portion of new US tariffs on Chinese products takes effect on Sunday, 1 September. On a positive note, China’s Commerce Ministry has just ruled out an immediate retaliation to last weekend’s US tariff increase.

China has ample means for retaliation but thinks the question that should be discussed now is about removing the new tariffs to prevent escalation. - Ministry of Commerce spokesman Gao Feng

Absent additional trade bashing, the focus should return to where we are in terms of the real impact so far. China’s purchasing managers index (PMI) and Korea’s export growth, the first August releases from the region due over the coming weekend, may provide some insight. While we anticipate no departure from the recent trend of weak exports depressing manufacturing, at least the trend doesn’t seem to have got any worse either. Nor has it bottomed.

The recent escalation of the tariff war provides no hopes of a near-term trade deal. As such, we are in for a long stretch of slow growth and increasingly challenging policy environment, as some central bankers have warned.

The Reserve Bank of Australia’s Governor Philip Lowe has recently pointed to policy challenges as “political shocks are turning into economic shocks” and argued about government stimulus as more impactful than cutting interest rates, which risks pushing up asset prices.

This suggests the RBA meeting next week will likely pass as a non-event, while Australia’s GDP growth has continued to slow (2Q GDP data is due next week). We, in line with consensus, expect no change to the 1.0% RBA policy rate, and a slowdown in GDP growth to 1.5% year-on-year from 1.8% in 1Q. However, continued negative capex growth in 2Q imparts a downside risk to our growth view. That said, we expect the RBA policy pause to continue until the end of the year.

Meanwhile, the August inflation releases in Indonesia and the Philippines will inform on central bank policy paths in these countries. The consensus view of a sharp fall in inflation below 2% (to 1.8% from 2.4% in July – the lowest in three years) would delight the Bangko Sentral ng Pilipinas (Philippines central bank) looking to cut rates further.

In Indonesia, we see inflation ticking up in August (to 3.5% from 3.2%), supporting our view of no more rate cuts from Bank Indonesia for the rest of the year.