8 February 2019
ASEAN morning bytes

General market tone: Risk-off.

Investors will likely book gains and pull back given renewed US-China trade and global growth fears.

EM Space: Wait and see as leaders opt not to meet before March

  • General Asia:  Risk-off sentiment will dominate Friday’s trading after growth forecasts have been lowered in Europe given ongoing trade negotiations between major economies. Meanwhile, investors are also now growing anxious on the trade front with Trump confirming that his meeting with President Xi will not happen until after the end of trade truce on 1 March.
  • Indonesia: Bank Indonesia reported that the fall in gross international reserves (GIR) to $120.1 bn in January from $120.65 bn was due to maturing external debt payments. Latest GIR level covers about 6.7 months of imports and 6.5 months of imports and debt payment, while BI assesses the economic outlook continuing to be sound.
  • Philippines:  The Bangko Sentral ng Pilipinas (BSP) left the policy rate at 4.75% even as the central bank pared its inflation forecasts. It sees 2019 inflation settling at 3.07% (vs. 3.18% earlier) on expectations of lower oil prices, the base effects, and stable food supply. The BSP made no mention of the reserve requirement ratio although we continue to expect a RRR cut this month. Meanwhile, gross international reserves continued to climb with the January reading now at $82.1 bn, up from $79.2bn in the previous month and worth up to 7.2 months of imports.    
Asia week ahead: China back in limelight

The key question of the week will be whether the forthcoming round of US-China trade negotiations bears out President Trump’s recent positive rhetoric on a trade deal

Next round of China-US trade talks

The Chinese markets will be back from the ‘Golden Week’ Lunar New Year holiday, though players are likely to tread a cautious path, taking cues from the January economic data and progress on the US-China trade talks.

Will the forthcoming round of the US-China trade negotiations bear out President Trump’s recent positive rhetoric on a trade deal?

The delegation led by US Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer will hold trade negotiations with their counterparts in Beijing next week. As in the last high-level meeting in late January (attended by China’s Vice Premier Liu He), we may hear about some more trade concessions from the Chinese side, though the most contentious issue about technology theft and intellectual property rights will continue to linger. Moreover, any major announcements, positive or negative, might well be withheld until after the Trump-Xi meeting in Vietnam at the end of the month.

Meanwhile, China’s January data calendar is shortened as the National Bureau of Statistics holds back the release of some indicators (industrial production, fixed asset investment, retail sales) deemed to be distorted by the timing of the Lunar New Year holiday, which either falls in January or in February. So far, signals have been mixed – the manufacturing economy continues to be weak while services are holding up. We will be watching the trade and monetary data to see the impact of the trade war and for signs of stimulus.

India: RBI’s surprise rate cut appears premature

The Reserve Bank of India (RBI) has ignored the inflationary consequences of the fiscal splurge and eased policy in support of the government’s drive to boost growth before the elections. We think the markets will view such a policy move as premature and the rupee will be the main victim  

An RBI rate cut with neutral policy stance

The RBI Monetary Policy Committee voted 4-2 to cut the key policy rate by 25 basis points, taking the repurchase rate to 6.25% and the reverse repo rate to 6.00%. The decision was surprising in that very few, only eight out of 38 participants in the Bloomberg survey anticipated it. As widely expected, there was no change to the banks’ reserve requirement rate of 4.00%. The MPC also switched its policy stance to ‘neutral’ from ‘calibrated tightening’, which was a unanimous decision by all members.

What’s more amazing though is the sharp swing in the policy perception within the MPC. Until late 2018, all but one member expressed caution on inflation and advocated a tighter stance with stable rates, whereas all favoured a neutral stance and the majority voted for a rate cut today.

Philippines: Reserve requirement ratio cut may be on the way

Inflation forecasts have been lowered due to lower oil prices and base effects

Inflation hazard appears averted

The Philippine's central bank (BSP) kept policy rates steady with the threat of contemporaneous inflation likely in the rear view mirror. Forecasts continue to show inflation gliding back within target for the year, with the latest readings showing inflation at 3.07% in 2019 (from 3.18%) and to 2.98% (from 3.04%) in 2020 owing to lower oil price assumptions and base effects.

BSP continues however to preach “data dependency” and may await further validation that inflation will settle within target, by their own accounts, as early as end-1Q before changing course. Given the supply-side nature of the recent inflation spike, we can expect price pressures to dissipate further even as the rice tarrification bill remains unsigned and crude oil prices remain muted. BSP’s inflation forecasts validate that the BSP is likely done with its tightening cycle, with a policy reversal in sight given slowing growth momentum and inflation in check. 

Reserve requirement cut in the works, RTB to follow?

The central bank will likely slash reserve requirement ratios (RRR) as early as February with inflation decelerating while domestic liquidity conditions remain relatively tight (latest M3 growth registering four straight months of single digit expansion). We expect the BSP to announce a reduction in reserve requirements at an off-cycle meeting given the governor’s assertions that the RRR is no longer a policy tool. Meanwhile, reports circulated on Thursday that the Bureau of the Treasury (BTr) was looking to issue a retail treasury bond (RTB) in the near term, with an RRR cut from the BSP one of the deciding factors for the timing of issuance.       

Inflation in rear view mirror, time to ease off the brakes

The BSP slammed on the brakes in 2018 given the hazard of second-round effects in full view. Now that the inflation threat appears safely in their rear view mirror we can see the central bank easing off the brake pedal ever so slightly by cutting rates in May after reducing RRR in 1Q. With growth expected to teeter close to the edge of 6% given the recent budget delay and with the inflation objective safeguarded, BSP may finally opt to give the economy an added boost to regain flagging growth momentum. 

Reading time around 6 minutes

Good MornING Asia - 8 February 2019

Concern that no trade deal between the US and China may be struck ahead of the March 1 trade truce deadline means only one thing in currency terms - a stronger dollar

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