General market tone: Wait and watch.
Market players will likely move sideways with some profit taking sparked by comments from Fed Governor Powell.
So far, the December data out from the region has indicated that 2018 has ended on a weaker note for Asian trade. The message from the raft of trade data out next week is unlikely to be any different
The week kicks off with trade data from China, followed by India, Indonesia, and Singapore.
Given that both, Korea and Taiwan posted negative export growth numbers last month, we can infer that the consequences of the US-China trade war are slowly working their way through the regional and expect upcoming trade releases to reinforce the impact.
Undoubtedly, China data will be watched closely as the latest round of trade talks have ended on a positive note but without much material progress. Will there be anything in this report to cheer President Trump? Nothing really at all. Judging by China’s ongoing widening trade surplus - one month’s figures aren’t going to make any dent. China's trade surplus with the US surged 17% in the first 11 months of 2018 from a year ago even as the total trade surplus was 19% lower on the year.
China's PPI inflation was down to 0.9% year-on-year in December from 2.7% previously. Apart from low energy prices, we find that some manufacturing sectors also exhibited very low PPI inflation, including automobiles. The government will likely soon provide incentives on the purchase of vehicles
Headline PPI was low at 0.9%YoY in December from 2.7% previously. We find from the breakdown of the data, metals and automobiles experienced deflation in PPI, which is alarming, and telecommunication-related industries also experienced very low inflation.
These details reveal that the manufacturing of automobiles and telecommunication parts and products weakened in December. And we think this phenomenon should continue in January if there is no stimulus support.
CPI inflation was also mild due to lower transport costs from lower energy prices, which should go up again in January from the rebound of energy prices.
China's monetary policy does not depend on inflation as the central bank does not have an inflation target. But as demand is weak in China, the central bank has started easing, and we expect more to come.
In 2018, automobile sales fell 6% in China, the first decline in 20 years. The government is going to stimulate this sector by giving incentives to purchase vehicles (most likely only for "new energy" vehicles) in rural regions, according to the official media.
This should provide support for the automobile industry, and prices should stabilise once the stimulus measures start.
We expect the formal announcement of such measures before the Chinese New Year, which falls on 5 February.
Regarding the telecommunication weakness, it is a result of at least two factors:
We believe that these factors will persist until the application of 5G begins.
Import growth slows, but exports actually shrink
The Philippine trade story remains the same with imports running well ahead of outbound shipments. Imports for November grew by 6.8%YoY versus Bloomberg consensus forecasts for a 13.3% print while exports struggled, posting negative growth at -0.3% when expectations were at 5.5%.
Fuel, raw materials and capital goods remained the largest contributors to overall import growth, expanding by 34.1%, 6.7%, and 4.9% respectively. Meanwhile, imports of consumer goods posted a contraction, mainly due to the -28.1% contraction for passenger cars with the negative growth attributed to the car buying spree ahead of the 2018 TRAIN law implementation.
Meanwhile, exports slumped by -0.3%YoY with the key electronics subsector contracting by 1.6%. All other export sectors managed to post a 1.6% expansion but this was not sufficient to offset the slump in the electronics sector. For the year so far, exports have posted a disappointing -0.9% growth rate despite the protracted weakness in the PHP.
With the Philippines shifting gears in its growth story, and investment becoming more important, imports of capital machinery and raw materials have helped push the year-to-date import bill to $86.74bn, widening the trade gap to $37.69bn for the first 11 months of 2018. With both the government and corporates doubling down on this capital-intensive growth, wide trade gaps are likely to be the norm in the medium term. Meanwhile, exports have seen a nice rebound. But they continue to lag outbound shipments with more than half of the entire portfolio linked to the weak electronics sector. These products rely heavily on imported components for production, which could explain why several episodes of Peso depreciation have not been able to give the export sector the type of boost it sorely needs.
Going forward, the current account will likely remain in the red as imports are well ahead of outbound shipments. The PHP has been benefiting from the EM rally in the first few weeks of the year with the Fed seen to be more dovish than last year. But with the Philippines expected to post current account deficits for the foreseeable future, we expect further pressure on the PHP to return in the coming months.
Powell repeats patience message, Moon sticks to policy mix for Korea, Brexit nears a crunch moment for May