Macro

In this briefing:

1. FLASH: UK Consumer Is Bullish BoB in Jan-19
2. Widodo Sets GIAA Fare / Ahok In PDI-P / Prabowo Still Misfiring / Oz Cepa / KPK on Beneficial Owners
3. FLASH: UK Parliamentary Theatrics Divorced from Deal
4. Trade War Uncertainty Bites into Investment Spending and Production

1. FLASH: UK Consumer Is Bullish BoB in Jan-19

• UK retail sales more than recovered their Dec-18 fall with a Jan-19 resurgence back above an already brisk trend. I still see the BoE as overly gloomy on demand.
• Surveys have softened amid ongoing political uncertainty, but the average British consumer appears bored of Brexit, and the so-called “BoBs” keep spending. Official data exceeded the surveys after the referendum and are doing so again.

2. Widodo Sets GIAA Fare / Ahok In PDI-P / Prabowo Still Misfiring / Oz Cepa / KPK on Beneficial Owners

Widodo intervened in the airfare pricing of Garuda Indonesia (Persero) (GIAA IJ), compelling it to drop its fares by 20%.  This serves a short-term election interest at the expense of investor confidence.  Ahok joined PDI-P, but only very peripherally.  The contradictory and hypocritical hyperbole in Prabowo’s persistent economic campaign messages still have yet to resonate with voters.  The trade agreement with Australia will happen in March, say ministers.  The KPK is prioritizing measures to disclose beneficial owners of companies. 

Politics: Jakarta Governor Basuki Tjahaja Purnama (‘Ahok’) announced that he had joined the PDI-Perjuangan party of Megawati, but officials made clear that he will not campaign for President Joko Widodo, nor does he have any status in the party other than “member” without rank.  He must work to attain the status of “cadre”.  Nonetheless, Megawati deserves credit for embracing an icon of pluralism and reform (Page 2).  Police named the hard-line Islamic leader Slamet Ma’arif as a suspect on charges of illegal campaigning.  Opposition figures decried this as yet another example of administration repression.  In fact, the charges against the cleric are sound (p. 3).  West Java Governor Ridwan Kamil rebutted accusations of campaign violations (p. 3).  Former First Lady Kristiani Herawati Yudhoyono is suffering from leukemia (p. 5).  Gerindra Chair Prabowo Subianto campaigned in Central Java and expounded on his familiar themes of wayward policymaking and economic deprivation.  Prabowo’s attempt to use hyperbole to excite voters has not worked in the four months of campaigning to date, but he has yet to alter his messaging (p. 5).  Widodo’s campaign team daily chair, Gen (ret) Moeldoko, declared that the strategy for the final 60 days of campaigning will be “total war”.  This elicited ridicule from the opposition (p. 8).  Former Constitutional Court Chief Justice Mahfud Mahmodin called on justices of the court to intervene in the leadership dispute dividing the Regional Representatives Assembly (DPD) (p. 9).  Solidarity Party (PSI) Chair Grace Natalie derided “faux‑nationalist” parties that fail to defend pluralism (p. 9). 

Justice: Anti-Corruption Commission (KPK) officials are prioritizing efforts to bring about better disclosure of the beneficial owners of companies (p. 10).

Policy News: The president prevailed upon the state airline Garuda to cut its domestic airfare after hikes last month.  The move avoids irking certain consumers prior to elections.  But ad hoc interventions by the president impose broad costs on the overall economy, by elevating perceptions of risk and deterring investment (p. 10).  The Islamic Justice Welfare Party (PKS) registered a host of objections to a proposed Bill on Sexual Abuse (p. 11).

International: The signing of the long-awaited Comprehensive Economic Part­nership Agreement (CEPA) with Australia will happen next month, say ministers (p. 11).

Economics: Investment Coordinating Board (BKPM) Chair Tom Lembong reiterated calls for revising the Negative Investment List (DNI) to allow investment in health and education (p. 11).

3. FLASH: UK Parliamentary Theatrics Divorced from Deal

• The government was defeated on a motion reiterating the approach passed on 29 January after Eurosceptics abstained in protest at the implied opposition to no deal. It does not bind the government or show no support for an amended deal.
• A state-dependent backstop break clause remains the most likely outcome, with the probabilities of a deal, no deal, and no Brexit still roughly 55:30:15, in my view. Parliamentary theatrics are not changing the facts on the ground.

4. Trade War Uncertainty Bites into Investment Spending and Production

Import elasticities. Ease of transferring business between countries. Reliability of alternative supply chains. Time taken to relocate production. The list of unknowns on how easily companies could relocate production from China goes on and on but the bottom line is that uncertainty has been raised and that is bad news for global growth.

In Reality Check: China and the US Trade War, we wrote “Even if the Trade War ends tomorrow, the damage  has already been done”. 

In this briefing:

1. Widodo Sets GIAA Fare / Ahok In PDI-P / Prabowo Still Misfiring / Oz Cepa / KPK on Beneficial Owners
2. FLASH: UK Parliamentary Theatrics Divorced from Deal
3. Trade War Uncertainty Bites into Investment Spending and Production

1. Widodo Sets GIAA Fare / Ahok In PDI-P / Prabowo Still Misfiring / Oz Cepa / KPK on Beneficial Owners

Widodo intervened in the airfare pricing of Garuda Indonesia (Persero) (GIAA IJ), compelling it to drop its fares by 20%.  This serves a short-term election interest at the expense of investor confidence.  Ahok joined PDI-P, but only very peripherally.  The contradictory and hypocritical hyperbole in Prabowo’s persistent economic campaign messages still have yet to resonate with voters.  The trade agreement with Australia will happen in March, say ministers.  The KPK is prioritizing measures to disclose beneficial owners of companies. 

Politics: Jakarta Governor Basuki Tjahaja Purnama (‘Ahok’) announced that he had joined the PDI-Perjuangan party of Megawati, but officials made clear that he will not campaign for President Joko Widodo, nor does he have any status in the party other than “member” without rank.  He must work to attain the status of “cadre”.  Nonetheless, Megawati deserves credit for embracing an icon of pluralism and reform (Page 2).  Police named the hard-line Islamic leader Slamet Ma’arif as a suspect on charges of illegal campaigning.  Opposition figures decried this as yet another example of administration repression.  In fact, the charges against the cleric are sound (p. 3).  West Java Governor Ridwan Kamil rebutted accusations of campaign violations (p. 3).  Former First Lady Kristiani Herawati Yudhoyono is suffering from leukemia (p. 5).  Gerindra Chair Prabowo Subianto campaigned in Central Java and expounded on his familiar themes of wayward policymaking and economic deprivation.  Prabowo’s attempt to use hyperbole to excite voters has not worked in the four months of campaigning to date, but he has yet to alter his messaging (p. 5).  Widodo’s campaign team daily chair, Gen (ret) Moeldoko, declared that the strategy for the final 60 days of campaigning will be “total war”.  This elicited ridicule from the opposition (p. 8).  Former Constitutional Court Chief Justice Mahfud Mahmodin called on justices of the court to intervene in the leadership dispute dividing the Regional Representatives Assembly (DPD) (p. 9).  Solidarity Party (PSI) Chair Grace Natalie derided “faux‑nationalist” parties that fail to defend pluralism (p. 9). 

Justice: Anti-Corruption Commission (KPK) officials are prioritizing efforts to bring about better disclosure of the beneficial owners of companies (p. 10).

Policy News: The president prevailed upon the state airline Garuda to cut its domestic airfare after hikes last month.  The move avoids irking certain consumers prior to elections.  But ad hoc interventions by the president impose broad costs on the overall economy, by elevating perceptions of risk and deterring investment (p. 10).  The Islamic Justice Welfare Party (PKS) registered a host of objections to a proposed Bill on Sexual Abuse (p. 11).

International: The signing of the long-awaited Comprehensive Economic Part­nership Agreement (CEPA) with Australia will happen next month, say ministers (p. 11).

Economics: Investment Coordinating Board (BKPM) Chair Tom Lembong reiterated calls for revising the Negative Investment List (DNI) to allow investment in health and education (p. 11).

2. FLASH: UK Parliamentary Theatrics Divorced from Deal

• The government was defeated on a motion reiterating the approach passed on 29 January after Eurosceptics abstained in protest at the implied opposition to no deal. It does not bind the government or show no support for an amended deal.
• A state-dependent backstop break clause remains the most likely outcome, with the probabilities of a deal, no deal, and no Brexit still roughly 55:30:15, in my view. Parliamentary theatrics are not changing the facts on the ground.

3. Trade War Uncertainty Bites into Investment Spending and Production

Import elasticities. Ease of transferring business between countries. Reliability of alternative supply chains. Time taken to relocate production. The list of unknowns on how easily companies could relocate production from China goes on and on but the bottom line is that uncertainty has been raised and that is bad news for global growth.

In Reality Check: China and the US Trade War, we wrote “Even if the Trade War ends tomorrow, the damage  has already been done”. 

In this briefing:

1. FLASH: UK Parliamentary Theatrics Divorced from Deal
2. Trade War Uncertainty Bites into Investment Spending and Production

1. FLASH: UK Parliamentary Theatrics Divorced from Deal

• The government was defeated on a motion reiterating the approach passed on 29 January after Eurosceptics abstained in protest at the implied opposition to no deal. It does not bind the government or show no support for an amended deal.
• A state-dependent backstop break clause remains the most likely outcome, with the probabilities of a deal, no deal, and no Brexit still roughly 55:30:15, in my view. Parliamentary theatrics are not changing the facts on the ground.

2. Trade War Uncertainty Bites into Investment Spending and Production

Import elasticities. Ease of transferring business between countries. Reliability of alternative supply chains. Time taken to relocate production. The list of unknowns on how easily companies could relocate production from China goes on and on but the bottom line is that uncertainty has been raised and that is bad news for global growth.

In Reality Check: China and the US Trade War, we wrote “Even if the Trade War ends tomorrow, the damage  has already been done”. 

In this briefing:

1. FLASH: UK Parliamentary Theatrics Divorced from Deal
2. Trade War Uncertainty Bites into Investment Spending and Production
3. An Unconvincing Transmission Mechanism of the Yield Curve to the Economy
4. FLASH: UK Inflation Grinds near Its Trough in Jan-19
5. Preserving Animal Spirits Becomes the Endgame for Fed Policy

1. FLASH: UK Parliamentary Theatrics Divorced from Deal

• The government was defeated on a motion reiterating the approach passed on 29 January after Eurosceptics abstained in protest at the implied opposition to no deal. It does not bind the government or show no support for an amended deal.
• A state-dependent backstop break clause remains the most likely outcome, with the probabilities of a deal, no deal, and no Brexit still roughly 55:30:15, in my view. Parliamentary theatrics are not changing the facts on the ground.

2. Trade War Uncertainty Bites into Investment Spending and Production

Import elasticities. Ease of transferring business between countries. Reliability of alternative supply chains. Time taken to relocate production. The list of unknowns on how easily companies could relocate production from China goes on and on but the bottom line is that uncertainty has been raised and that is bad news for global growth.

In Reality Check: China and the US Trade War, we wrote “Even if the Trade War ends tomorrow, the damage  has already been done”. 

3. An Unconvincing Transmission Mechanism of the Yield Curve to the Economy

Researchers at the St. Louis Fed recently published a paper concluding that “an inverted yield curve might do more than predict a recession: It might actually cause one.”  This analysis of the effect of the flattening of the Treasury yield curve on bank profitability and lending, while common, looks incorrect to us.

4. FLASH: UK Inflation Grinds near Its Trough in Jan-19

• UK inflation disappointed consensus expectations in Jan-19 but was broadly in line with my forecasts at 2.5% on the RPI and 1.85% on the CPI.
• The energy price cap was probably poorly accounted for, and it looks set to induce further volatility in the April and October prints.

5. Preserving Animal Spirits Becomes the Endgame for Fed Policy

Fed Chair Powell’s forthcoming Congressional Testimony on monetary policy later this month assumes greater importance compared to recent years due to the recent dovish tilt in policy posture following communication errors in 2018.

Financial market volatility may have adversely affected animal spirits in the real economy, an outcome which the Federal Open Market Committee (FOMC) seeks to avoid, but members will still be open to accusations that they capitulated to pressure from financial markets.

Accepted proxies for corporate animal spirits in the real economy indicate moderation over the past 12 months even before Q4’s market turbulence, but current levels are still far from disastrous and hitherto do not suggest a total cessation in risk- taking activity.

Supply-side responses in the labour market over the 12-months, notably a rise in the participation rate for prime aged workers, have reduced the downward pressure on the unemployment rate, thereby enabling the Fed to embrace its patient policy approach.

The FOMC will retain their dovish tilt towards policy conduct until March, but, thereafter, the tone of incoming economic data, notably inflation, will ultimately determine the direction of the next change in the federal funds rate and its timing.

In this briefing:

1. Trade War Uncertainty Bites into Investment Spending and Production
2. An Unconvincing Transmission Mechanism of the Yield Curve to the Economy
3. FLASH: UK Inflation Grinds near Its Trough in Jan-19
4. Preserving Animal Spirits Becomes the Endgame for Fed Policy

1. Trade War Uncertainty Bites into Investment Spending and Production

Import elasticities. Ease of transferring business between countries. Reliability of alternative supply chains. Time taken to relocate production. The list of unknowns on how easily companies could relocate production from China goes on and on but the bottom line is that uncertainty has been raised and that is bad news for global growth.

In Reality Check: China and the US Trade War, we wrote “Even if the Trade War ends tomorrow, the damage  has already been done”. 

2. An Unconvincing Transmission Mechanism of the Yield Curve to the Economy

Researchers at the St. Louis Fed recently published a paper concluding that “an inverted yield curve might do more than predict a recession: It might actually cause one.”  This analysis of the effect of the flattening of the Treasury yield curve on bank profitability and lending, while common, looks incorrect to us.

3. FLASH: UK Inflation Grinds near Its Trough in Jan-19

• UK inflation disappointed consensus expectations in Jan-19 but was broadly in line with my forecasts at 2.5% on the RPI and 1.85% on the CPI.
• The energy price cap was probably poorly accounted for, and it looks set to induce further volatility in the April and October prints.

4. Preserving Animal Spirits Becomes the Endgame for Fed Policy

Fed Chair Powell’s forthcoming Congressional Testimony on monetary policy later this month assumes greater importance compared to recent years due to the recent dovish tilt in policy posture following communication errors in 2018.

Financial market volatility may have adversely affected animal spirits in the real economy, an outcome which the Federal Open Market Committee (FOMC) seeks to avoid, but members will still be open to accusations that they capitulated to pressure from financial markets.

Accepted proxies for corporate animal spirits in the real economy indicate moderation over the past 12 months even before Q4’s market turbulence, but current levels are still far from disastrous and hitherto do not suggest a total cessation in risk- taking activity.

Supply-side responses in the labour market over the 12-months, notably a rise in the participation rate for prime aged workers, have reduced the downward pressure on the unemployment rate, thereby enabling the Fed to embrace its patient policy approach.

The FOMC will retain their dovish tilt towards policy conduct until March, but, thereafter, the tone of incoming economic data, notably inflation, will ultimately determine the direction of the next change in the federal funds rate and its timing.

In this briefing:

1. An Unconvincing Transmission Mechanism of the Yield Curve to the Economy
2. FLASH: UK Inflation Grinds near Its Trough in Jan-19
3. Preserving Animal Spirits Becomes the Endgame for Fed Policy

1. An Unconvincing Transmission Mechanism of the Yield Curve to the Economy

Researchers at the St. Louis Fed recently published a paper concluding that “an inverted yield curve might do more than predict a recession: It might actually cause one.”  This analysis of the effect of the flattening of the Treasury yield curve on bank profitability and lending, while common, looks incorrect to us.

2. FLASH: UK Inflation Grinds near Its Trough in Jan-19

• UK inflation disappointed consensus expectations in Jan-19 but was broadly in line with my forecasts at 2.5% on the RPI and 1.85% on the CPI.
• The energy price cap was probably poorly accounted for, and it looks set to induce further volatility in the April and October prints.

3. Preserving Animal Spirits Becomes the Endgame for Fed Policy

Fed Chair Powell’s forthcoming Congressional Testimony on monetary policy later this month assumes greater importance compared to recent years due to the recent dovish tilt in policy posture following communication errors in 2018.

Financial market volatility may have adversely affected animal spirits in the real economy, an outcome which the Federal Open Market Committee (FOMC) seeks to avoid, but members will still be open to accusations that they capitulated to pressure from financial markets.

Accepted proxies for corporate animal spirits in the real economy indicate moderation over the past 12 months even before Q4’s market turbulence, but current levels are still far from disastrous and hitherto do not suggest a total cessation in risk- taking activity.

Supply-side responses in the labour market over the 12-months, notably a rise in the participation rate for prime aged workers, have reduced the downward pressure on the unemployment rate, thereby enabling the Fed to embrace its patient policy approach.

The FOMC will retain their dovish tilt towards policy conduct until March, but, thereafter, the tone of incoming economic data, notably inflation, will ultimately determine the direction of the next change in the federal funds rate and its timing.

In this briefing:

1. An Unconvincing Transmission Mechanism of the Yield Curve to the Economy
2. FLASH: UK Inflation Grinds near Its Trough in Jan-19
3. Preserving Animal Spirits Becomes the Endgame for Fed Policy
4. The Pros and Cons of Whether We Will See A Deal

1. An Unconvincing Transmission Mechanism of the Yield Curve to the Economy

Researchers at the St. Louis Fed recently published a paper concluding that “an inverted yield curve might do more than predict a recession: It might actually cause one.”  This analysis of the effect of the flattening of the Treasury yield curve on bank profitability and lending, while common, looks incorrect to us.

2. FLASH: UK Inflation Grinds near Its Trough in Jan-19

• UK inflation disappointed consensus expectations in Jan-19 but was broadly in line with my forecasts at 2.5% on the RPI and 1.85% on the CPI.
• The energy price cap was probably poorly accounted for, and it looks set to induce further volatility in the April and October prints.

3. Preserving Animal Spirits Becomes the Endgame for Fed Policy

Fed Chair Powell’s forthcoming Congressional Testimony on monetary policy later this month assumes greater importance compared to recent years due to the recent dovish tilt in policy posture following communication errors in 2018.

Financial market volatility may have adversely affected animal spirits in the real economy, an outcome which the Federal Open Market Committee (FOMC) seeks to avoid, but members will still be open to accusations that they capitulated to pressure from financial markets.

Accepted proxies for corporate animal spirits in the real economy indicate moderation over the past 12 months even before Q4’s market turbulence, but current levels are still far from disastrous and hitherto do not suggest a total cessation in risk- taking activity.

Supply-side responses in the labour market over the 12-months, notably a rise in the participation rate for prime aged workers, have reduced the downward pressure on the unemployment rate, thereby enabling the Fed to embrace its patient policy approach.

The FOMC will retain their dovish tilt towards policy conduct until March, but, thereafter, the tone of incoming economic data, notably inflation, will ultimately determine the direction of the next change in the federal funds rate and its timing.

4. The Pros and Cons of Whether We Will See A Deal

There is rising discussion about the probability of whether we will see a deal between the US and China to prevent a full blow trade war by March 1.  We wanted to give you our assessment and its many layers.

In this briefing:

1. The Nascent Democratic Primary: ‘How Best to Beat Trump?’

1. The Nascent Democratic Primary: ‘How Best to Beat Trump?’

Campaigning is underway in the Democratic Party’s lengthy ‘primary’ process for determining a 2020 presidential nominee.  Polls suggest that ousting President Donald Trump is the foremost priority for most supporters of the party.  Relative to past elections, the party boasts an extraordinarily diverse and energetic field of declared and potential contenders.  Meanwhile, the president is clearly vulnerable. 

Much depends, however, on whether the eventual challenger combines relatively centrist economic views with a persona that can bridge America’s yawning cultural divide.  Because of the country’s anachronistic electoral‑college system, a nominee remote from the mainstream could alienate independents in ‘swing states’ and inadvertently aid Trump.  Attention is therefore focusing on the questions of who can beat Trump – and how. 

In this briefing:

1. The Nascent Democratic Primary: ‘How Best to Beat Trump?’
2. BoE: Extracting the Policy Option Value of Delays

1. The Nascent Democratic Primary: ‘How Best to Beat Trump?’

Campaigning is underway in the Democratic Party’s lengthy ‘primary’ process for determining a 2020 presidential nominee.  Polls suggest that ousting President Donald Trump is the foremost priority for most supporters of the party.  Relative to past elections, the party boasts an extraordinarily diverse and energetic field of declared and potential contenders.  Meanwhile, the president is clearly vulnerable. 

Much depends, however, on whether the eventual challenger combines relatively centrist economic views with a persona that can bridge America’s yawning cultural divide.  Because of the country’s anachronistic electoral‑college system, a nominee remote from the mainstream could alienate independents in ‘swing states’ and inadvertently aid Trump.  Attention is therefore focusing on the questions of who can beat Trump – and how. 

2. BoE: Extracting the Policy Option Value of Delays

• The BoE MPC was unanimous in voting for no policy changes in Feb-19, as widely expected. Hawkish pressures remain in the Bank’s forecast, but the policy option value of a delay is high enough to tolerate them until after EU withdrawal.
• Downgrades to the Bank’s demand forecasts were surprisingly significant given the PMIs bias to overreact to uncertainty. Allaying those concerns is likely to be too difficult to do in time for a May-19 rate hike.
• I now expect the BoE to hike Bank rate to 1.0% in Aug-19, assuming a smooth exit from the EU in the interim. The data should seem better than the Bank fears by then, to the extent that the disinflationary effect of GBP appreciation is offset.

In this briefing:

1. An Unconvincing Transmission Mechanism of the Yield Curve to the Economy
2. FLASH: UK Inflation Grinds near Its Trough in Jan-19
3. Preserving Animal Spirits Becomes the Endgame for Fed Policy
4. The Pros and Cons of Whether We Will See A Deal
5. No Upside For Korean Companies – Underweight

1. An Unconvincing Transmission Mechanism of the Yield Curve to the Economy

Researchers at the St. Louis Fed recently published a paper concluding that “an inverted yield curve might do more than predict a recession: It might actually cause one.”  This analysis of the effect of the flattening of the Treasury yield curve on bank profitability and lending, while common, looks incorrect to us.

2. FLASH: UK Inflation Grinds near Its Trough in Jan-19

• UK inflation disappointed consensus expectations in Jan-19 but was broadly in line with my forecasts at 2.5% on the RPI and 1.85% on the CPI.
• The energy price cap was probably poorly accounted for, and it looks set to induce further volatility in the April and October prints.

3. Preserving Animal Spirits Becomes the Endgame for Fed Policy

Fed Chair Powell’s forthcoming Congressional Testimony on monetary policy later this month assumes greater importance compared to recent years due to the recent dovish tilt in policy posture following communication errors in 2018.

Financial market volatility may have adversely affected animal spirits in the real economy, an outcome which the Federal Open Market Committee (FOMC) seeks to avoid, but members will still be open to accusations that they capitulated to pressure from financial markets.

Accepted proxies for corporate animal spirits in the real economy indicate moderation over the past 12 months even before Q4’s market turbulence, but current levels are still far from disastrous and hitherto do not suggest a total cessation in risk- taking activity.

Supply-side responses in the labour market over the 12-months, notably a rise in the participation rate for prime aged workers, have reduced the downward pressure on the unemployment rate, thereby enabling the Fed to embrace its patient policy approach.

The FOMC will retain their dovish tilt towards policy conduct until March, but, thereafter, the tone of incoming economic data, notably inflation, will ultimately determine the direction of the next change in the federal funds rate and its timing.

4. The Pros and Cons of Whether We Will See A Deal

There is rising discussion about the probability of whether we will see a deal between the US and China to prevent a full blow trade war by March 1.  We wanted to give you our assessment and its many layers.

5. No Upside For Korean Companies – Underweight

Korean overseas shipments are falling and so are export prices. Manufacturing inventory to shipment ratios are soaring and the sector itself has been flirting with recession for months now. Corporate profits remain healthy but not for long. With minimum wages slated to rise 54% between 2017 and 2022 and corporate tax rates having already moved higher, there are few upsides for Korean companies. We expect the investment cycle to remain subdued and for companies to accelerate the move abroad to lower cost manufacturing hubs. The government’s ‘income-led growth’ strategy will boost domestic consumption temporarily at best. The growth outlook is dim. Underweight Korean equities.