Get ready for an exciting September
The trade war will persist as a major overhang on global and Asian markets. The consultation period for further US tariffs on China ends next week (5 September) after which Washington could impose duties on another $200 billion worth of Chinese goods. China has pledged $60 billion of retaliatory tariffs on US products.
We believe the markets are pretty much priced for this oncoming trade risk and are unlikely to be jolted by it. Hopefully, a stable start to the new month will also bring more clarity on a host of other important economic issues in developed markets; the Fed’s tightening cycle, the ECB tapering timeframe, and the Brexit deal. And if that's not enough, the contagion risks from emerging economies continue to linger with Argentina and Turkey remaining on edge, so we'll be in for a month full of excitement and elevated market volatility.
On the data front, next week in Asia is packed with trade, manufacturing and inflation releases from across the region. There is little on the policy front except for a Malaysian central bank (BNM) meeting which will likely be a non-event, though ugly inflation data from the Philippines will keep the central bank there (BSP) on its toes.
Export performance still not too bad
August trade releases from Korea and Taiwan, the first for the month from the region, will be closely watched for the trade war impact. The focus will also be on the manufacturing purchasing manager indexes (PMIs) from around the region, particularly the new export orders component.
Our house forecasts for export growth - 11% year-on-year for Korea and 5% for Taiwan- imply positive month-on-month gains for two consecutive months, indicating there has been no impact yet from escalating trade tensions. Already-released data showing a 15% year-on-year surge in Korean exports in the first 20 days of August confirms this point.
Semiconductors continue to be the main driver of Korean exports but tariff-hit steel exports are also holding up. It looks like the shift in trade away from the US to other countries has already started, judging by the recent surge in Korea’s and Japan’s steel exports to India.
Philippines inflation monster rears its head higher
There's a slew of August inflation data from the region next week but figures from the Philippines’ will be the most important. We see inflation surging past the 6% mark for the first time in over a decade from 5.7% in July, consistent with the consensus centred on 6%. Bad inflation data will keep the central bank (BSP) on its toes, even as the currency (PHP) has stabilised from a Turkish-led downturn in early August.
High inflation and twin-deficits (trade and government) have kept the PHP under intense weakening pressure this year, with a 6.6% year-to-date depreciation. The question is, will the BSP overlook the inflation data and wait for the recent 100 basis point rate hike to take effect. The current economic backdrop suggests the BSP policy tightening has further room to run. The next BSP meeting is on 28 September. We expect the BSP to pause at this meeting but hike again in the final quarter of the year.