Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Macroeconomics

The FOMC is all but certain to formally announce the start of "tapering" at its next meeting in 6 weeks time (2-3 November 2021), i.e., the formal end to monthly purchases of US$120 billion of Treasury and agency securities. The FOMC statement after last week's meeting was about as clear as the FOMC ever is: "Last December, the Committee indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward its maximum employment and price stability goals. Since then, the economy has made progress toward these goals. If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted."In reality, a moderation in the pace of asset purchases (as reflected in the overall size of the monetary base) has already occurred. In the latest 3 months, the US monetary base increased by a cumulative US$88 billion (i.e., far below the US$360 billion of total increase in asset purchases promised for that period).  This enabled M2 growth to decelerate notably -- from 20.6% YoY in March 2021 and 14.6% YoY in April to 12% YoY in July 2021. With US real GDP growing 6.3% QoQ (saar) in 1Q 2021 and 6.6% in 2Q 2021, M2 growth of over 20% YoY (following the previous year's 20%-plus growth rates) was clearly excessive. But with M2 decelerating to 12% YoY growth, the severity of upward pressure on prices has begun to ease somewhat -- and core CPI inflation moderated from 4.5% YoY in June 2021 to 4.3% in July and 4% YoY in August 2021. The further reining-in of the monetary base over the next few months (and a complete end to QE asset purchases no later than mid-2022) should contribute to a smooth transition to decelerating M2 (8% YoY by the turn of the year) and slightly lower inflation rates -- although both core-PCE and core-CPI inflation are likely to remain above 3% YoY for the rest of 2021. A gradual tightening of monetary conditions (already underway for 3 months, but being formalized in the period ahead) will steadily push bond yields higher and steepen the yield curve. The predictable steepening of the curve will be positive for banks, and the strengthening economic recovery will boost earnings across the economy. We remain wary of the long-term implications of CAPE (Shiller's cyclically-adjusted P/E ratio), which at 38.3x is at its highest since the 2000 peak. But near-term, the conventional P/E ratio will moderate (from 34x currently), so we are bullish about the equity market for the rest of 2021.

The FOMC is all but certain to formally announce the start of "tapering" at its next meeting in 6 weeks time (2-3 November 2021), i.e., the formal end to monthly purchases of US$120 billion of Treasury and agency securities. The FOMC statement after last week's meeting was about as clear as the FOMC ever is: "Last December, the Committee indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward its maximum employment and price stability goals. Since then, the economy has made progress toward these goals. If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted."In reality, a moderation in the pace of asset purchases (as reflected in the overall size of the monetary base) has already occurred. In the latest 3 months, the US monetary base increased by a cumulative US$88 billion (i.e., far below the US$360 billion of total increase in asset purchases promised for that period).  This enabled M2 growth to decelerate notably -- from 20.6% YoY in March 2021 and 14.6% YoY in April to 12% YoY in July 2021. With US real GDP growing 6.3% QoQ (saar) in 1Q 2021 and 6.6% in 2Q 2021, M2 growth of over 20% YoY (following the previous year's 20%-plus growth rates) was clearly excessive. But with M2 decelerating to 12% YoY growth, the severity of upward pressure on prices has begun to ease somewhat -- and core CPI inflation moderated from 4.5% YoY in June 2021 to 4.3% in July and 4% YoY in August 2021. The further reining-in of the monetary base over the next few months (and a complete end to QE asset purchases no later than mid-2022) should contribute to a smooth transition to decelerating M2 (8% YoY by the turn of the year) and slightly lower inflation rates -- although both core-PCE and core-CPI inflation are likely to remain above 3% YoY for the rest of 2021. A gradual tightening of monetary conditions (already underway for 3 months, but being formalized in the period ahead) will steadily push bond yields higher and steepen the yield curve. The predictable steepening of the curve will be positive for banks, and the strengthening economic recovery will boost earnings across the economy. We remain wary of the long-term implications of CAPE (Shiller's cyclically-adjusted P/E ratio), which at 38.3x is at its highest since the 2000 peak. But near-term, the conventional P/E ratio will moderate (from 34x currently), so we are bullish about the equity market for the rest of 2021. 

US: Moving from Stealth to Formal Taper; Bond Yields Will Gently Rise

Cross Asset Strategy

We agree with the FOMC projection of a short and sharp recession, but not with its sanguine view about inflation; we expect the next rate hike within a year from now. Given the 19.55 million net job losses in March-May 2020 (more than double of the 8.36 million jobs lost in Feb08-Oct09), massive slack remains in the labour market. However, we think the huge fiscal stimulus (13% of GDP this year, 5% next year) and continuing monetary stimulus will accelerate the recovery, and particularly cause inflationary pressures to emerge by early-2021 as the economy rebounds, necessitating a tightening of monetary conditions by mid-2021. M2 (+24% YoY in May 2020) is already growing more than twice as fast as at the peak of QE-I, and is bound to generate inflation once real GDP grows decisively in 4Q 2020 and 1H 2021, normalizing velocity. We recommend Buying US banks, which will benefit from the steady steepening of the US yield curve. 
The over-correction in the job market in April (with 20.7 million jobs cut) was partly reversed in May 2020, with 2.5 million net new jobs added; the net job loss of 19.55 million in Mar-May 2020 is still more than double of all jobs lost (8.36 million) in the last recession (Feb08-Oct09). The extreme volatility over the last 3 months should not obscure the fact that the unemployment rate is still a lofty 13.3% (having never been above 11% between 1948 and March 2020). We continue to expect a V-shaped recovery, but 3Q 2020 will still be part of the down-slope of the V because of weak consumption. The FOMC agrees: their median forecast for the unemployment rate is 9.3% in 4Q 2020 with 5% real GDP growth in 2021, and 3.5% in 2022. 
At the peak of QE-I in the aftermath of the GFC ("Lehman crisis"), M2 was only growing 10.4% YoY (January 2009) despite the YoY doubling in the monetary base. This time, with the monetary base growing only half as rapidly, money supply (M2) has already accelerated to 24% YoY growth. A collapse in the velocity of money is the key reason why inflation will not rise in the near-term. Once the unemployment rate is below 9% by end-2020, and confidence in the economy is restored, velocity will normalize. If the FOMC is still growing its balance sheet at the end of 2020 (as it now promises to do), core inflation is likely to be above 2% by 1Q 2021. With social distancing rules in place, the "full-employment" (NAIRU) unemployment will be lower (around 6%), a level we expect to be reached by mid-2021. The Fed will be obliged to tighten monetary conditions (first by reining-in base money, then restoring a reserve requirement) in 1Q 2021, and will be obliged to raise the Fed Funds rate no later than mid-2021. Given this trajectory, we would recommend equities emphatically over bonds, and specifically US banks as beneficiaries of a steadily steepening yield curve.

We agree with the FOMC projection of a short and sharp recession, but not with its sanguine view about inflation; we expect the next rate hike within a year from now. Given the 19.55 million net job losses in March-May 2020 (more than double of the 8.36 million jobs lost in Feb08-Oct09), massive slack remains in the labour market. However, we think the huge fiscal stimulus (13% of GDP this year, 5% next year) and continuing monetary stimulus will accelerate the recovery, and particularly cause inflationary pressures to emerge by early-2021 as the economy rebounds, necessitating a tightening of monetary conditions by mid-2021. M2 (+24% YoY in May 2020) is already growing more than twice as fast as at the peak of QE-I, and is bound to generate inflation once real GDP grows decisively in 4Q 2020 and 1H 2021, normalizing velocity. We recommend Buying US banks, which will benefit from the steady steepening of the US yield curve. 
The over-correction in the job market in April (with 20.7 million jobs cut) was partly reversed in May 2020, with 2.5 million net new jobs added; the net job loss of 19.55 million in Mar-May 2020 is still more than double of all jobs lost (8.36 million) in the last recession (Feb08-Oct09). The extreme volatility over the last 3 months should not obscure the fact that the unemployment rate is still a lofty 13.3% (having never been above 11% between 1948 and March 2020). We continue to expect a V-shaped recovery, but 3Q 2020 will still be part of the down-slope of the V because of weak consumption. The FOMC agrees: their median forecast for the unemployment rate is 9.3% in 4Q 2020 with 5% real GDP growth in 2021, and 3.5% in 2022. 
At the peak of QE-I in the aftermath of the GFC ("Lehman crisis"), M2 was only growing 10.4% YoY (January 2009) despite the YoY doubling in the monetary base. This time, with the monetary base growing only half as rapidly, money supply (M2) has already accelerated to 24% YoY growth. A collapse in the velocity of money is the key reason why inflation will not rise in the near-term. Once the unemployment rate is below 9% by end-2020, and confidence in the economy is restored, velocity will normalize. If the FOMC is still growing its balance sheet at the end of 2020 (as it now promises to do), core inflation is likely to be above 2% by 1Q 2021. With social distancing rules in place, the "full-employment" (NAIRU) unemployment will be lower (around 6%), a level we expect to be reached by mid-2021. The Fed will be obliged to tighten monetary conditions (first by reining-in base money, then restoring a reserve requirement) in 1Q 2021, and will be obliged to raise the Fed Funds rate no later than mid-2021. Given this trajectory, we would recommend equities emphatically over bonds, and specifically US banks as beneficiaries of a steadily steepening yield curve.     

Labour Market Slack Remains but FOMC Will Need to Tighten by Mid-2021

United States

Financial Institutions, Inc. is a bank holding company for several community banks based in western and central New York.  The Company, through subsidiaries, also provides brokerage services, employee benefits, and compensation consulting services.

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Financial Institutions (FISI US)

US: Moving from Stealth to Formal Taper; Bond Yields Will Gently Rise

Base money rose just US$88bn in the latest 3 months, so tapering had begun but will now be formalized. As inflation edges lower but EPS growth...

Prasenjit K. Basu

Labour Market Slack Remains but FOMC Will Need to Tighten by Mid-2021

We agree with the FOMC projection of a short and sharp recession, but not with its sanguine view about inflation; we expect the next rate hike...

Prasenjit K. Basu

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