6 July 2018
Asia week ahead: China in focus amid tariff threat

China’s foreign exchange reserves data for June should give an idea about the extent of capital flight as the Chinese yuan turned from Asia's outperformer to an underperformer with 3% depreciation

Downside risk to consensus on China reserve data

It’s no longer a question if the US will go ahead with tariffs on Chinese imports tomorrow (6 July) - instead, it's now more a question about the aftermath – the impact on the world’s second-biggest economy and then on the rest of the world. As a result, China’s economic data for June will be under close scrutiny.

The data dump starts with foreign exchange reserves data this weekend (7 July), followed by inflation, bank lending, and trade over the course of the coming week, and then culminates into second quarter GDP release the following week.

Of all, the foreign exchange reserves will be key given what's been happening to the Chinese yuan (CNY) following the US tariff announcement in mid-June – a shift from being Asia’s outperformer until the announcement to underperformer with over 3% depreciation since. The latest depreciation reminds us of the 2.7% devaluation in August 2015 and judging from a $93bn fall in reserves in August 2015, the consensus of only $8bn reserves fall may appear to be understating the capital flight from China.

Malaysia: Downside trade surprise

The forthcoming trade war clouds the outlook for Malaysia’s economy and currency. We have revised our USD/MYR forecast for end-2018 for further weakness to 4.35 from 4.05    

A downside export surprise

Malaysia’s exports in May grew by 3.4% year-on-year, slower than the consensus forecast of 6.4%, while import growth of 0.1% was in line with expectations. These growth rates are down from 14% and 9% respectively in April. The high base effect explains some of the slowdown: both export and import growth peaked above 30% in May 2017. Commodities and electronics continue to dominate the overall trade picture, both posting a sharp growth slowdown in May.

The year-to-date export growth of 6.9% YoY and import growth of 1.3% have both slowed sharply from 23% and 28% respectively a year ago. But the trade surplus of MYR 54.5bn in the first five months was still wider than MYR 33bn surplus in the same period of 2017. 

The trade war clouds outlook

The trade war clouds the outlook for Malaysia’s trade and GDP growth for the rest of the year. We expect the pass-through of weakening global trade to commodity prices, and then to Malaysia’s export weakness, to shift the MYR from being Asia’s outperformer to being one of its underperformers in the rest of the year (see Asian foreign exchange in tariff tantrum). We have revised our USD/MYR forecast for end-2018 for further weakness to 4.35 from 4.05 (spot 4.05). 

Philippines: Inflation soars in June

Further monetary policy tightening is likelier at the next meeting, after inflation soared to 5.2% in June

Inflation surprising on the upside could require a more aggressive monetary tightening.

Inflation soared to a 5.5-year high of 5.2% in June from May’s 4.6% and beat the upper end of BSP’s forecast range of 4.3-5.1%. Consensus was at a more moderate 4.8%. Core inflation also jumped to 4.3% in June, from May’s 3.6%. Higher inflation for food and non-alcoholic beverages, utilities, transportation and education combined to bring the upside inflation surprise. The cost of education plays a significant role every June as school tuition and fees are paid just before the start of the school year. Excluding the impact of education, headline inflation would still be high and would be at the upper end of BSP’s forecast range. Full implementation of the government's supply augmenting measures would moderate inflation. However, additional cost-push pressures are emerging. Three regional wage boards approved 4-5% increases in minimum wages. Another regional wage board might approve a 6% increase. In addition, the government has allowed a 12% increase in minimum transport fares for the country’s capital and two adjoining regions. Expanding the increase to other regions could follow. Another price pressure is through the recovering oil price. PHP weakness is another price pressure and it depreciated by c.7% YoY in June.  Demand pull price pressures from strong economic activity and income tax reform are likely to exacerbate the tught price environment. These price pressures, together with the upside June inflation surprise, fuel expectations of high inflation. Reining in inflation expectations, aside from stabilizing PHP, may require a more aggressive central bank response. We now expect BSP to raise policy rates at the next policy rate meeting (in August) by at least 25bp. A higher policy rate increase is possible.

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Good MornING Asia - 6 July 2018

They've only gone and done it! Tariffs, that is

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