General market tone: Risk-off.
Minutes from the latest Fed minutes showed that almost all members of the FOMC remained in favor of raising rates, despite criticism from the White House
We don't think the Bank of Korea (BoK) will hike at this Thursday's meeting, and we don't believe a hike is what the Korean economy needs. But government pressure is building, and we may see Governor Lee hint at a hike in November.
As far as forward guidance goes, BoK Governor Lee has provided a little for everyone recently. For the seven of 18 consensus hawks looking for a policy rate hike to 1.75% from 1.5% at this meeting, comments that inflation was no impediment to a rate hike now the headline rate was close to 2.0%, house prices high and household debt worrisome, the outcome must seem fairly clear.
But the Governor has also been clear to point out that structural issues such as household debt are not a monetary issue alone. He has also noted that the house price problem is largely a Seoul-only phenomenon. And any hike that is administered would have to be set against the expectation that the BoK will be revising down their GDP forecasts in their latest assessment.
We're reasonably comfortable in forecasting no change to rates this month, and will provide some more detail in the coming paragraphs. But we are less comfortable with our no change in rates this year. We may get a signal on Thursday 18th October that a November hike is coming. In which case, we will not ignore it and will change our current forecasts for no change this year. That doesn't mean we will agree with it.
Non-oil domestic exports (NODX) rise 8.3%YoY, -4.3%MoM. Pharmaceuticals growth again prevents a bigger export headache.
There are some rather predictable export trends emerging at an industry level: Singapore's electronics exports were lower than the same month a year ago, for the tenth consecutive time in September. Admittedly the year-on-year decline is reducing. But September is usually a very weak month anyway for electronics exports. All those electronic components destined for electrical consumer durable goods will already have been exported ahead of the gift-giving season in the West, so there is little comfort to be gleaned there.
There isn't all that much life in the petrochemical sector either, which is 1.5% lower than a year ago. That's a bit worrying. This sector should be a good litmus test for regional activity...
So were it not for another stellar performance by the pharmaceutical industry, showing a 67.5%YoY gain, exports overall would have looked dreadful.
Given the vagaries of year on year data and inconsistent base effects, the chart below shows the data in year-to date year-on-year form, which irons out some of the wrinkles. Again, the message is, pharma looks awesome, everything else looks distinctly moribund.
Although there is clearly a longer term relationship between non-oil domestic exports and industrial production in Singapore, it is not particularly tight. What then, is the relationship between monthly moves in these indicators? Does the September NODX tell us anything about the later release of industrial production, and hence GDP growth?
Well, it turns about that the answer is yes, albeit somewhat unreliably. The month-on-month percentage change in non-seasonally adjusted NODX does move with industrial production - much of the time in the same month. Where deviations occur, it looks as if the NODX data tends to provide a one month lead over the production numbers. So it seems, production responds to export demand, sometimes with a lag, rather than exports responding to production. That sort of makes sense.
In this case, with production playing catch up with exports, a decline in unadjusted production data would equate to a negative year on year result, and potentially, some downward revision to the advance 3Q18 GDP figure (was 2.6%YoY).
Lifting a key overhang on currency markets, the US Treasury didn't label China as a currency manipulator. But the risk of higher US interest rates continues to weigh on markets