A question of confidence
Recent market moves are like a game of chicken between optimists - geared up by tax-cut fuelled economic growth, and pessimists weighed down by rising valuations and borrowing costs. What happens next in aggregate may be determined by the tiniest of changes in sentiment.
The mood is black in Asia
In the US, strong growth data has pushed up sentiment, causing the stock market and other risk asset markets to rise, and bonds to sell off. That same bond market sell-off raises the risk-free rate, undermining stock valuations and causing some long-risk investors to trim positions, sending risk asset prices down again. Bond yields fall. Today we are roughly back where we started yesterday. The 10Y US Treasury yield is about 3.18, though got as high as 3.23% yesterday. Stocks, however, are lower. The USD stronger.
In Asia, it isn't even that good. The growth story is at best trundling along with no significant uptrend in sight. In some economies, even that so-so growth appears challenged. China is still achieving growth, but at what cost to deleveraging and overcapacity? The external deficit economies of India, Indonesia and the Philippines are having to squeeze growth with higher rates to prevent their currencies from dropping sharply. We will see just how successfully later today when the RBI decides how to address its problems. Near neighbour, Sri Lanka is also running into trouble. The lesson India should learn from them is, not hiking is a good way to see your currency plunge. Central bank rhetoric and import curbs aren't much use when confidence evaporates. Even intervention is usually only a short-term stop-gap.
The same rise in global (US) yields is also opening up a gap with local Asian yields and weighing on Asian FX performance. Today, we will see inflation data from the Philippines for August, partly influenced by recent hurricane damage to food and therefore food prices, but also reflecting a weaker peso and higher import prices. Our economist in Manila, Nicky Mapa, sees a higher than consensus 6.9%YoY inflation print today - some further growth dampening tightening appears warranted here too. Even in Korea, where the growth data has been fairly disappointing, today's September inflation print came in noticeably higher than expected, with headline inflation now at 1.9% and core inflation back above unity at 1.2%YoY. Some of the blame must be due to a weaker KRW. Ever higher oil prices don't help.
Is good news bad news?
With the potentially market-moving jobs report from the US out later today, what's the best outcome for Asia. Well if it's anything like Wednesday's strong ADP report, Asia could do with a weak number. In particular, I think a softer wages figure could help trim optimism and put some downward pressure on shorter-term US yields and thereby the USD. And softer wages is looking likely. Our house view is for the wages growth to fall from 2.9% to 2.8%YoY. but even that will require a further 0.4%MoM increase, which would be a real step up in the monthly wages run rate. Last year, September wages grew an impressive 0.5%MoM (rounded), though dropped 0.2% the following month. Is there some crazy out of step seasonal at work here? We'll find out later today, but if there is, and we see either a revision down to last month's growth data (often happens) or an undershoot of the 2.8% consensus view, then such bad news might be regarded by Asian investors as rather good. Until then, however, Asia is likely to remain under pressure.
Download
Download opinion
5 October 2018
Good MornING Asia - 5 October 2018 This bundle contains 3 Articles"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).