24 August 2018
Trade war: China retaliates but with a punchier list

China’s decision to include automobiles in the retaliatory tariffs list is a more aggressive move than we expected, but for now the real concern is what the ‘qualitatively measures’  will be if the US imposes 25% tariffs on $200 billion of goods

 As the US imposes 25% tariff on $16 billion of imported goods from China, China retaliated with the same amount but with a revised list of goods that contains automobiles, which we see as a more aggressive retaliatory measure.

Qualitative retaliations could include placing administrative measures on US companies operating in China or following the US lead and leveraging 'national security' to prevent American companies operating in the country

The $16 billion revised tariff list from China includes medical equipment and automobiles when the US administration would like to help American automobiles fare better in the international market. We see this list as more punchy than the previous one even the amount involved stays the same at $16 billion. 

The dollar index has reacted in strengthening trend and the yuan weakened against the dollar.

Singapore core July inflation provides the MAS with options

Against the backdrop of the unfurling trade war, we don't expect the Monetary Authority of Singapore (MAS) to tighten policy any further at its October meeting, but with growth and inflation data holding firm in recent months, the balance of risks has shifted back slightly towards more tightening.

Recent activity data hasn't been bad, now the inflation figures are following suit.

Looking back over the last month, and Singapore's run of data has been a bit better than we had expected. At the end of July, Industrial production surprised on the upside, retail sales weren't bad, 2Q GDP was a slight miss, but is more about the past than the present, so we will ignore that (conveniently), and non-oil domestic exports (NODX) were also decent. 3Q18 has started well, and from a reasonable 2Q18 base. 

Today's inflation figures slot into that picture, with a satisfactory reading that saw headline consumer prices fall 0.1% on the previous month to leave inflation at 0.6%YoY, but the core rate focussed on by the MAS, pushing up from 1.7% to 1.9%YoY, above our and consensus expectations. 

There is no MAS inflation target as such (just some expectations), but at close to but just a little below 2.0%, we imagine the MAS will be happy with that outcome. 

Does this justify more MAS tightening?

If nothing else were changing, we might be sympathetic to some more tightening by the MAS at the October meeting. But the global economic outlook is far from clear, and with the only other Asia economies tightening being those under FX depreciation pressure (Singapore dollar has been one of the regions outperformers since April), the rationale for stepping up tightening again seems poor. 

This could change. If for example, the trade war ended, and Emerging Market pressure lifted amidst a weakening US Dollar, tightening could resume. But if anything, we expect the global growth and trade backdrop to get worse, not better, and that suggests the MAS will keep conducting monetary policy much more cautiously. 

Thailand: Economy isn’t screaming out for tighter policy, yet

But the central bank (BoT) has already started thinking about the timing of policy normalisation. Although we aren’t expecting any change to BoT policy this year, the currency's (THB) position as one of Asia's outperformers since July has prompted a revision of our year-end USD/THB forecast to 33.5 from 35.0   

Two things setting a mixed tone for THB

First, the trade data showed a significant negative swing in the trade balance to a deficit of $516 million in July from a $1.6 billion surplus in the previous month. This came amid steady trade growth; export growth of 8.3% year-on-year and import growth of 10.5%, both little-changed from their pace in June. The cumulative trade balance of a $2.9 billion surplus in the first seven months of the year compares with a $7.5 billion surplus a year ago.

The trade surplus is on track to narrow in 2018 for a second straight year. The annual surplus narrowed by $6 billion year on year in 2017 to $15 billion. At the year-to-date pace, we anticipate an $8-9 billion full-year narrowing in 2018, with the potential escalation of a global trade war also boding ill for exports and the trade balance in the rest of the year. This is negative for the Thai baht.

Second, the Bank of Thailand’s minutes of the policy meeting held earlier this month revealed that policymakers pondered over the timing for monetary policy normalisation. However, the timing depends on continued economic growth and inflation ‘firmly’ in the target range of 1-4%. In his response to better-than-expected 2Q18 GDP growth earlier this week, BoT Governor Veerathai Santiprabhob signalled the unwinding of an 'extremely accommodative stance'. This has set the positive tone for the THB.

We need to look at policy space in the future, we need to have enough bullets in hand - BoT Governor Veerathai

However, the central bank’s optimism on growth and inflation remains at risk. Growth eased to 4.6% in 2Q18 from a five-year high 4.9% in 1Q18. The high base effect together with still-weak domestic demand and the global trade war could push it below 4% in the second half of the year, imparting a downside risk to the BoT’s 4.4% forecast for 2018. And absent a food or oil price shock, inflation is likely to slow below the BoT target in coming months.

Asia week ahead: Bank of Korea policy standoff

The Korean central bank policy meeting will be a non-event. China’s August PMI will reflect the first full month of the trade war impact, while India looks poised to post a GDP slowdown

China: PMI to reflect full-month of trade war impact

The ongoing trade war with the US has put China’s high-frequency activity data under an intense spotlight. Next week's data includes industrial profits for July and the manufacturing and non-manufacturing Purchasing Managers Indexes (PMIs) for August.

The manufacturing PMI for August will reflect the first full month of the US-China trade war impact. The consensus is centred on our 51.2 forecast, unchanged from July, but the risk is tilted on the downside rather than upside.

Consistent with the Chinese stock market sell-off underway since the start of the year, industrial profit growth has slowed to 17.2% year-on-year in the first half of the year from 22% a year ago. This closely tracks the Li Keqiang index (the composite index of year-on-year activity growth, including growth in outstanding bank lending- Premier Li’s preferred gauge of the economy) which shows the slowdown continued in July (see figure).  

Reading time around 6 minutes

Good MornING Asia - 24 August 2018

So what has changed about the US economy? What will Powell talk about? For us, the biggest changes in the economy concern the consumption and production of virtual goods, and the flattening of the Philipps curve. Both suggest that central bank policy needs to adapt. But has it?  

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