Asia week ahead: Initial signs of Delta downturn?

Australia’s flash PMI over the weekend kicks off a string of data reports from Asia next week, with regional inflation, manufacturing and trade reports lined up. Meanwhile, in July, China's industrial profits are likely to expand year on year, padded by base effects. Still, overall profit levels may actually dip from the previous month, with the effects of the recent government crackdown on technology, education and real estate sectors spilling over to manufacturing firms.

In July, Singapore industrial production was supported by firm exports, but we are expecting a retracement from the outsized 25.7% YoY surge in June as base effects turn unfavourable. Thailand also reports manufacturing production during the week. We expect an 11.0% YoY increase - a deceleration from the previous month as base effects fade and mobility restrictions weigh overall economic activity.

Meanwhile, Taiwan is expected to post another month of robust growth, largely driven by the high demand for computer chips. Some semiconductor companies are pushing capacity utilisation past 100% to satisfy demand.

Regional inflation is set for a slight deceleration trend across the reporting countries.

Singapore’s July headline inflation should ease to 2.2% YoY from 2.4% from the previous month. This stems from lower housing inflation due to Services and Conservancy Charges (S&CC) rebate for public housing. However, a 3.8% hike in the electricity tariff for the current quarter offsets some of these S&CC effects. Core inflation probably ticked up to 0.7% YoY from 0.6%.

At this rate, annual average headline inflation should exceed the MAS’s 0.5% to 1.5% forecast range, but the core rate should be within 0% to 1%. We don’t see any significant policy implications of this data, with the MAS likely staying on a neutral policy course in the October statement. Meanwhile, Malaysia July inflation is expected to decelerate to 2.9% from 3.4% previously, on soft domestic demand and as base effects fade.

We also get trade reports from both Thailand and Malaysia.

Base effects will likely keep YoY growth rates positive, but we note the overall deceleration from the previous month’s readings as the strain from tightened mobility restrictions and anxiety over the Delta variant begin to take hold. Malaysia's export growth may ease to 8% YoY (from 27% previously), resulting in a trade surplus of roughly MYR20mn, which should be positive for the ringgit in the near term.

However, the negative factors of rising Covid-19 cases and political uncertainty locally, coupled with falling global oil prices, outweigh the positives and should keep the currency on a depreciation path.

In the coming weeks, we believe the focus may increasingly shift towards concerns about the growth narrative as the Delta variant spreads across the globe. At the same time, base effects that have distorted YoY growth will continue to fade as we move into the second half of 2021.

Concerns over the Delta variant and the impact on global growth is already being factored in by monetary authorities. For example, the Reserve Bank of New Zealand paused at its recent meeting after the country tightened up movement restrictions on Tuesday. We expect the Bank of Korea to possibly take cue from the RBNZ and leave rates unchanged too.