September inflation data today comes as the first test of the RBI's decision a week ago to leave monetary policy on hold. Besides the central bank's inaction, nothing from the government side has worked so far to prop up the rupee, prompting yet another upward revision to our end-year USD/INR forecast to 76.5 from 75.0
Today's release of Indian consumer price inflation data for September will be the first test of the central bank’s (RBI) decision a week ago to leave its interest rate policy on hold. Even though inflation slowed sharply in July and August, that was more of a function of base effects than any underlying price weakness.
Food, utilities, and transport have been standout drivers of lower CPI inflation in recent months (see figure). But month-on-month increases in these components have been positive since April and likely have been sustained in September, boosting the headline back above 4% from 3.7% in August. The August print was the lowest point in 10 months. Core inflation has been running at around 6%, which is where we expect it to stay.
China’s 3Q GDP and the Korean central bank policy meeting are the key highlights of next week. While growth slowdown in China is pretty much priced in by the markets, the Bank of Korea’s policy decision looks like it'll be a close-to-call event
China is due to publish its first GDP report since the trade war kicked off in early July, and we think it is likely to show only a negligible impact. However, it is entirely possible that third-quarter data might not even capture the full impact of the trade war.
This is because the first formal salvo of the $34bn of US tariffs hit on 6 July, followed by $16bn on 23 August and a further escalation to an additional $200bn a month later. Moreover, exports were little affected with still high single-digit year-on-year growth. This is what, we think, underpins the consensus view of 6.6%, a meagre drop from the 6.7% in the previous quarter. Our forecast is 6.5%.
Among the remaining economic indicators due in September, consensus expectations indicate a slight slowdown in exports and industrial production growth, steady retail sales growth, and a pick-up in fixed asset investment growth - all consistent with the forecast of a slight dip in GDP growth.
Beijing is trying to offset potential export weakness (as a result of higher tariffs) by boosting domestic infrastructure spending and dialing back on deleveraging and manufacturing sector reforms. With macro policy geared towards a soft-landing, our house view remains that the economy continuing to eke out GDP growth at an excess of 6% during the tariffs era.
General market tone: risk-off
Risk aversion continued to be the theme with traders increasingly worried about the still elevated levels for bond yields and the potential impact of the trade war on global growth.
Apart from slowing exports and manufacturing, a tighter fiscal policy stance will be a potential headwind to GDP growth. We maintain our view that the central bank will leave monetary policy on hold through 2019
Following on from surprisingly weak exports in August, industrial production growth slowed to 2.2% year-on-year in that month from 2.6% in July. The outcome was slightly weaker than the consensus, which centred on 2.3% growth, with estimates ranging from our low-end 1.6% to 4.5% YoY. Manufacturing and utilities dragged headline IP growth lower, while mining continued to contract albeit at a more moderate rate than in July.
Among other manufacturing indicators including sales, employment in the sector and wages, all posted slowdowns in August. Manufacturing sales growth of 8.1% YoY was down from 9.6% in July. Wage growth eased to 9.7% from 10.1%, and jobs growth to 1.9% from 2.0%.
Both exports and production growth are slowing on a trend basis (see figure), which will be associated with a slowdown in GDP growth. The high base-year effect also has been in play in driving the GDP slowdown. We expect GDP growth to settle around 4% in the second half of the year, for a full-year average growth of 4.5%. Our forecast for 3Q remains at 4.1%.
With the economy enjoying the lowest rate of inflation in Asia the central bank (Bank Negara Malaysia) has greater policy leeway to support growth in the period ahead. Earlier this week, BNM Governor Nor Shamsiah Yunus expressed confidence about robust private sector activity continuing to support the economy into 2019 even as global trade tensions weigh on exports.
However, we believe the tighter fiscal policy stance will be a potential headwind to growth. The government is considering new taxes and asset sales to make up for the revenue loss from scrapping the Goods and Services Tax and to repay its debt. We maintain our view that BNM will leave the rate policy on hold through 2019.
Further falls on stocks overnight, and it would seem odd for them to rally as we head into the weekend, but this still doesn't feel like the "Big one". Meantime, Singapore's central bank tightens policy slightly. And India's CPI data comes as the first test of the RBI's policy inaction a week ago