The fear of a global trade war weighs on Asian central bank policy tightening. We expect Singapore and Korea to keep policies on hold, while markets glean through China’s trade data for the impact of the conflict
The highlight of the week is the Monetary Authority of Singapore’s (MAS) semi-annual statement, which will be accompanied by an advance estimate of GDP growth for 1Q18. The last MAS statement in October 2017, in which they referred to the phrase “a neutral policy stance is appropriate for an extended period” as the October 2016 guidance, triggered expectations of a return to tightening.
The neutral MAS policy stance, or stable Singapore dollar nominal effective exchange rate (S$-NEER) over the policy horizon, has been in place since April 2016. The consensus for the upcoming statement is tilted toward a return to the “modest and gradual” S$-NEER appreciation path. However, we are sceptical because of the narrowly-driven growth, ultra-low inflation, and the threat of a global trade war.
The consensus for 1Q18 GDP growth is 3.9% year-on-year, up from 3.6% in 4Q17. So far the evidence of last year’s economic strength continuing this year has been mixed. The growth of non-oil domestic exports slowed sharply, whereas manufacturing bounced in 2018. Both NODX and manufacturing are narrowly driven by semiconductors, and similar contrast as the headline NODX and manufacturing growths is observed for semiconductor exports and manufacturing. The headline and core CPI inflation of 0.2% YoY and 1.5% respectively in the first two months was within the official forecast for 2018.
Inflation rose to 4.3% in March but a weaker peso could eventually nudge the central bank to turn hawkish
March inflation posted a five-year high at 4.3%, up from 3.8% in February and slightly above the consensus forecast of 4.2%. But this was within Bangko Sentral ng Pilipinas (BSP's) forecast range of 3.8% to 4.6%.
Price pressures were broad-based with seven of the 11 categories posting year-on-year increases. The BSP expects inflation to moderate in between the 2% to 4% target range over the policy horizon which argues for steady policy rates. Base effects and government action would allow for this price moderation. Rice supply constraints continue to increase food inflation higher while higher oil prices and excise taxes sustain the pressure on transport, “sin” product prices.
The weak peso (PHP) also contributed to the uptick in inflation.
The government’s plan to import rice and tapering impact of tax-related price pressures would moderate inflation over the policy horizon. Saudi Arabia plans to cut its oil price for Asia next month as US oil makes inroads into Asia, but the sustained weakness of the peso is likely to increase its impact on overall inflation. The peso is 4.4% YoY weaker in April which would likely lead to a 0.25ppt impact on inflation.
We cannot brush aside the possibility of a significantly weaker peso.The PHP weakened by 7% to 9% in 2013, 2015 and 2016 due to the shifting US monetary policy and heightened local and global risks. A weak peso may eventually spur the central bank to turn hawkish.
The fear of a global trade war weighs on Asian central bank policy tightening. We expect Singapore and Korea to keep policies on hold next week, while markets glean through China’s trade data for the impact of the conflict
(Note to readers: We are traveling in the next week, so there will be no publication. The next report will be on April 16.)