8 October 2018
ASEAN Morning Bytes

General market tone: wait and see. US jobs numbers slip below estimates but the previous month’s numbers revised higher. Wage growth slowed but remains well above 2%.

International theme: US jobs data mixed, market awaits fresh developments

  • US economic data was mixed with the latest print falling below market expectations although previous month’s numbers were bumped up substantially. Wage growth slowed although remained elevated enough to keep markets skittish.
India’s central bank leaves rupee on the path to free fall

By keeping the policy on hold, it seems the central bank of India has dumped the rupee, which leaves the ball in the government’s court for more substantial currency stabilisation measures. We just revised our year-end USD/INR forecast to 75.0 from 73.5, though now it seems, maybe it wasn't enough 

RBI surprises by keeping rates unchanged

The Reserve Bank of India’s monetary policy committee voted 5-1 to keep the repurchase and reverse repurchase rates unchanged at 6.50% and 6.25% respectively at today’s meeting. One dissenter vote was in favour of a 25bp rate hike. Even as most MPC members voted to change the stance to a calibrated tightening, there was an evident lack of action on their part despite time running out to stop the rupee's worst fall in last five years.

The decision was surprising for us and many others as only nine out of 49 participants in the Bloomberg poll had predicted no change, which seemed to be impacted by domestic liquidity concerns rather than currency weakness, even as a depreciating rupee remains a constant threat to the RBI’s inflation target. We thought the RBI would give some thought to supporting the rupee in a pre-emptive move to curb future inflationary pressures, however, in the end, we and many others were wrong.

The stable policy might be consistent with inflation within the policy target of 2-6%, however, as we have noted earlier this is more of a transitory low inflation phase rather than an ever-lasting trend. And we don’t have to wait for too long to see the recent dip in inflation being reversed. We anticipate a bounce back in inflation above the 4% mid-point of the policy target next Friday, thanks to the double whammy of rising oil prices and the weak currency.

After a moderate slippage in July and August, oil has caught up with the steady upward momentum, and this will eventually come through in domestic fuel prices. Even the move earlier this week to cut retail fuel prices ( 1 rupee per litter) appears too small to make an impact on overall inflation, let alone satisfy consumer or the markets.

Malaysia: Dismal August export performance

The clawback of the MYR’s recent underperformance relative to the oil price hinges on the trajectory Malaysia’s exports and GDP growth take going forward, though today’s weak export report doesn’t bode well here. We maintain our end-year USD/MYR forecast of 4.25  

Weak demand, not prices, driving export slowdown

Beating the consensus of steady high single-digit growth, Malaysia’s exports contracted by 0.3% year-on-year in August, down from 9.4% growth in July (consensus estimate 8.0%). This was the first negative print in two years, excluding the Chinese new year-related contraction in February this year. The authorities release data in local currency (MYR) terms, though that didn’t make much difference and the USD-value exports slowed too, albeit a 4.4% YoY growth in August.

The real culprit was demand, not the price, as reflected by a 3.4% YoY fall in the volume of exports in August, a sharp negative swing from 6% growth in the previous month. But the export unit value inflation quickened to 3.3% from 3.1% over the same months, while terms of trade improved too.

Looking at export products, commodities continued to be a weak spot with the third consecutive month of year-on-year decline. This was a bit odd because even the global oil price was softer in three months through August, it was still 50% above the year-ago level. Not only oil exports, but electricals and electronics exports also slowed.

Philippines inflation prints at 6.7% in September

Philippines inflation hit 6.7% year on year in September as base effects helped limit the rise.  Prices accelerated by 0.93% versus August.  Meanwhile, core inflation moderated to 4.7% from 4.8% in the previous month 

Inflation slips below consensus as base effects limit the year-ago rise

The major contributor to inflation remains food, which saw inflation pick up to 9.7% from 8.5% with all items seeing faster inflation except for utilities which showed a 4.6% growth compared with 5.5% in the previous month.

The 6.7% print supports our assessment that inflation is close to or has peaked for the year and is expected to taper off going into the year-end. The Philippine peso will benefit from favourable base effects going into December. Rice imports have arrived in ports and are presently being distributed with up to 750,000 MT expected to arrive in the coming weeks to help alleviate further pressures.  We hope further non-monetary policy measures begin to take root ahead of the Christmas season. On risks to the upside, oil prices remain elevated, which has been reflected in the recent price increases at the pump.

That being said, the central bank (BSP) remains vigilant against any signs of second-round effects and will look to anchor inflation expectations going forward. This diminishes to some extent the likelihood of a 25 basis point rate hike in November, as the BSP is likely to keep its powder dry for further action if warranted, should the Peso continue to slide.

Reading time around about 5 minutes

Good MornING Asia - 8 October 2018

The hurricane-distorted jobs report for September doesn't alter the fact that the US economy remains strong and the Fed remains on the tightening path, while Asian giants China and India defy the global tightening cycle  

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