Thinner market liquidity and busier central banks will define trading in Asia next week. The Lunar New Year holiday in most countries will reduce liquidity. Four regional central banks hold policy meetings, with the key question being whether those of India and the Philippines will ease policy or stand pat. Gong Xi Fa Cai!
It’s going to be a dull week with Chinese markets on holiday all of next week for the New Lunar Year, the first of two Golden Weeks holidays in China in a year, while most other Asian markets are also out for a day or two to usher in the Year of the Pig. The week is also scant on economic data from the region.
However, any trading that does take place in regional markets next week will be driven by US-China trade tensions. Scepticism about progress from the ongoing high-level talks abounds but any positive news could put to rest expectations of prolonged trade tensions weighing on global growth.
General market tone: Risk-on.
Risk on sentiment may still dominate Friday although gains will be capped ahead of the US jobs report.
Authorities have more reasons to be wary about the ongoing currency strength while exports are poised to falter. That said, we are reviewing our USD/THB forecast for a re-test of the 33-level following a change in Fed policy
Thailand’s balance of payments data for December today showed the current account surplus bouncing to over $5 billion in the month from $1.6 billion in November. This was way above the consensus of $3.5 billion and our estimate of a $3.9 billion surplus. We knew from the positive swing in the customs-basis trade balance- to a surplus in December from a deficit in November- that the goods trade boosted the current surplus. But there was more to it than just that; the seasonal surge in tourism in December appears to have boosted service-related inflows.
However, the overall payments balance swung to a deficit of $182 million in December from a $384 million surplus in the previous month, a sign of capital outflow. Indeed, foreigners were net sellers of both Thai equities and bonds in December.
China's PMI headline index rose in January to 49.5 from 49.4, but the detailed message from the components is not so reassuring
The vast majority of forecasters including ourselves anticipated a decline in this PMI index this month, so what is going on? At a component level, the output index did increase by 0.1pp, and stands at a modest 50.9, consistent with very slow, but positive growth. But the decline in the supplier delivery time index to 50.1 from 50.4 is more consistent with weakness than a pick up in activity. Inventories also rose, which will have fed through to the headline increase, But this is in all likelihood a reflection of stocking-up ahead of tariff concerns. It probably shouldn't be read positively. it may have to be unwound in the months ahead.
Moreover, forward-looking indicators of Chinese manufacturing strength, such as new orders, fell slightly again to 49.6, indicating outright shrinkage at these levels.
Moreover, when viewed by size of firm, there is a clear split between large enterprises, and everyone else. Large firms showed a pick up from 50.1 to 51.3. They are probably the easiest for banks to support with recent monetary stimulus measures. But the additional effort of getting loans out to small and medium-sized firms shows in outright falls in the indices for these firms at levels well below the 50 break-even level.
Tomorrow's Caixin PMI, which has a greater private sector focus than these official PMIs will probably show a similar discrepancy. Our Greater China Economist, Iris Pang, sees the Caixin Manufacturing PMI index falling to 49.2 from 49.7.
The non-manufacturing sector fared better according to these latest data. The headline non-Mfg PMI index rose to a respectable 54.7 from 53.8, helping lift the composite index to 53.2. New orders rose to 51.0 from 50.4. But while some other component indices also rose, like employment, export orders, backlogs of work and inventories, they remained below 50, suggesting merely that the rate of actual decline in these areas was lessening, but has not yet reversed.
We didn't learn much this week - The Fed is still bowing to market pressure; trade-talk rumours remain positive, And weakness from Korea kickstarts the day. Enjoy the Weekend.