11 October 2018
ASEAN Morning Bytes

General market tone: slight risk-off

Risk assets took a tumble on Wednesday with tech shares leading the sell-off amid intensified worries about rising bond yields and slower economic growth 

International theme: Techs are falling and rates are rising

  • Risk-off sentiment remained the general theme with most US markets down significantly, although Asia managed to bounce on hopes that the Chinese yuan would steady.
  • Fed president Charles Evans indicated that he believes the neutral rate is closer to 3%, suggesting that he supports up to 3 more rate hikes by the Fed before pausing.  This points to a more dovish side for the President from Chicago.  Meanwhile, the US President appears unhappy at the pace of rate hikes by the Fed but this is not the first time the President has thrown criticism the way of the Fed. Both developments may help yields from rising much further from here.   
What can we expect from Singapore’s central bank?

There are many good reasons why a meeting of the Monetary Authority of Singapore (MAS) on Friday 12 October will likely deliver no additional steepening of the Singapore dollar's nominal effective exchange rate (NEER) path or change to exchange rate bandwidth or central point

Why even consider anything other than no change?

It might seem like we are preaching to the converted. After all, why on earth would the MAS tighten monetary policy on Friday? I admit we don't see it.

But MAS Managing Director, Ravi Menon, gave an upbeat view of the global economy in comments to Bloomberg at the recent Singapore Fintech Festival. He felt that China's growth was still pretty healthy, though the trade wars did deliver cause for concern if, for example, growth fell below 6%. His description of the US economy as "chugging along" also sounds like quite an understatement given 2Q18 growth in excess of 4%. But although he viewed the global economy as fairly resilient, he did indicate that global growth would likely slow a touch next year and the year after.  

Reasons not to be cheerful

But were Mr Menon's remarks those of a man about to tighten policy and either push up the slope or the central point of the MAS Nominal Effective Exchange Rate  (NEER) band?  Or were they simply observational? 

Reasons not to hurry into changing the MAS' policy target are legion: 

  • The SGD is doing nicely without any change in target. Indeed, recent regional FX weakness has seen the SGD appreciate quite sharply before returning to its current value of USD/SGD 1.38.
  • During this recent SGD volatility, the 3M Sibor rate has been very steady - so it does not look like the MAS is leaning against either recent appreciations or depreciation. 
  • The outlook for the international economy is highly uncertain  - Chinese GDP Growth, trade wars, oil prices, Brexit, risk appetite and financial market valuations might all turn more negative in the near future, so why not wait?
  • The domestic economy is not in amazing shape either. Recent production data growth has slowed to 3.3%YoY, down from 20.5% just over a year ago. And non-oil domestic export growth is not that good either at 5.0%YoY, though the trend rate of growth is maybe firming a little.  
  • The NEER is already a little stronger than the mid-point of our calculated band and requires no further official response.
  • Some of the better signals of domestic economic strength, such as the certificate of entitlement (COE) for car ownership, keep falling. 
  • Private home prices and rentals are apparently now rising quarter on quarter, month on month according to official figures. But the official view does not stack up against anecdotes and some private measures, which suggests that condo rentals at least, are still struggling. 

Its not all bad

But then on the other hand, inflation is now on a core basis, virtually at 2.0% (1.9%YoY), though this sounds less impressive when you realize that the core MAS measure subtracts exactly those meaningful domestic demand signals, such as private transportation (the COE) and accommodation (rentals), so the headline measure at 0.7%YoY, may be a better indicator of actual "core" inflation. And is clearly less impressive. 

Though GDP might be very soft

In addition to the MAS' currency path decision, the Ministry of Trade and Industry (MTI) will also release advance GDP estimates for 3Q18. The QoQ annualized figure we estimate doesn't sound bad at all, at 5.5%. But this will still leave the annual growth rate at only 2.6%YoY, a noticeable slowdown, even if this leaves the economy still on track for a 3.3% growth total for the year. 

We will also get the MAS range for GDP in 2019. This is currently 1.5% to 3.5%, with a mid-point of 2.5%. We don't see this changing, though there is a risk it gets trimmed to 1-3%, for a midpoint of 2%, reflecting the risks facing the global and Singaporean economy. 

Philippines: Deficit surges to $26bn this year

Imports keep up the pace while exports underperform, yielding yet another substantial trade gap to keep the current account in the red

Imports sustain double-digit expansion, up by 11.0% while exports tepid at 3.1%

  • Philippine imports for August grew by 11.0% YoY to deliver another month of robust growth. Capital equipment and the oil bill powered overall import growth, translating to annual growth rates of 12.9% and 42.3% respectively.
  • Positive demand was seen across all subsectors, although consumer goods imports and raw materials import growth slowed to single-digit growth prints of 5.9% and 4.3%, respectively. 
  • Electronics exports, which command the lion's share of total exports (54.3% of the total), grew by 7.0% to lift overall exports to a 3.1% growth print.  All other exports however contracted by 1.2% despite a much weaker Peso, which has failed to boost export competitiveness to date.
  • Manufacturers continue to import raw materials used for electronics exports. These are up 22.1% for the year. The prospect is for sustained growth of the export sector for the rest of the year.
  • Capital goods imports in tandem with the bloated oil bill have kept the trade balance in the red as exports continue to underperform, down 2.0% for the year.

Trade gap to remain wide as imports sustain growth while exports disappoint despite weaker Peso

  • The trade deficit in July of $3.513 billion will likely keep the country’s current account in deficit as capital imports and oil import growth are not expected to slow down in the near term.  Raw materials used for construction posted 38.7% growth in August, moving in-line with the aggressive building plans of the private sector and government alike.  The 8-month 2018 trade deficit reached $26 billion, 65% wider than the deficit of $15.791 billion in the same 8-month period of 2017.
  • Despite protracted weakness in the Philippine Peso, exports continue to underperform, posting a 2% contraction YTD and only a feeble 3.1% growth in August.  In turn, the weaker currency may have fomented even more inflationary pressure given the hefty import bill related to consumption and transportation. 
  • Recent strong rhetoric from the central bank in response to soaring inflation and to a weakening PHP could help to stem the currency's weakness and prevent the trade gap from widening further. But exports will need to rebound in the coming months to truly make some headway. The prognosis is for the current account to remain in the red, exerting further pressure on the local unit despite BSP's already very hawkish stance. 
Reading time around about 7 minutes

Good MornING Asia - 11 October 2018

So after yesterday's big market correction, what can we expect now? Treasury yields may hold some important clues

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