Macro

In this briefing:

1. Taiwan: Manufacturing Still Rules the Roost
2. Reforms/US-Canada-China/ Economic Gloom/Bike Crash/Stocks
3. IDR, CPI, Oil, Trans-Java & Freeport Strengthen Widodo / Lippo Case Escalates / Efta Cepa / Debates
4. India Monthly Report Nov-Dec 2018
5. Japan – Policymakers Panicking, We Are Not

1. Taiwan: Manufacturing Still Rules the Roost

“No longer is Taiwan the isolated, renegade province. Increasingly it is an integrated part of the Greater China economy.”
–Asianomics Report, No. 5/2013, Taiwan: Paradox Island, 11 June 2013

Famous last words. Five years ago all the talk was of the Economics Co-operation Framework Agreement (ECFA) between Taiwan and Mainland China brokered by the then Kuomintang Government led by President Ma Ying-jeou and the Xi Jinping Administration. The main focus at that time was on the services sector deal which would allow Taiwanese banks, insurance companies and other service industries greater access to a market that the manufacturing sector had penetrated years before.

There was opposition on the island to the opening (there would have been opposition even if it hadn’t been China) but the whole deal went into abeyance as soon as Tsai Ing-wen, then the leader of the pro-independence Democratic Progressive Party (DPP), won the presidency in 2016 (Tsai resigned as party leader after the DPP’s defeat in this November’s local elections). Today, Taiwan is in the deep freeze as regards China relations and feeling increasingly bullied and bribed by the Mainland (see Taiwan Politics: Bullied and Bribed by the Mainland). The country, as ever, is reliant on the global trade cycle although, truth be told, that is a millstone of its own making. There are great companies listed on the Taiwan Stock Exchange and investors should be heavily positioned in them but, increasingly, they have nothing to do with what is going on in Taiwan itself. That looks unlikely to change in the near future.

2. Reforms/US-Canada-China/ Economic Gloom/Bike Crash/Stocks

China News That Matters

• No one dictates to China but me
• US targets Chinese hackers as rift widens
• Weak data raise pressure for stimulus
• After high-speed climb, bike-share giant collapses
• A brighter new year for China’s stock market?

3. IDR, CPI, Oil, Trans-Java & Freeport Strengthen Widodo / Lippo Case Escalates / Efta Cepa / Debates

Prabowo has yet to dent Widodo’s 20-point lead in polls and, meanwhile, certain key macro-economic figures are finally swinging in the incumbent’s favor.  Jakarta and Surabaya are linked by toll road — after decades of work.  The Freeport mine nationalization went through, benefiting Widodo (but possibly no one else).  The Efta Cepa bodes well for other trade agreements in the works.  The Lippo Group scandal is escalating, but not yet affecting James Riady.  PT Toba Sejahtera Tbk suffered damaging NGO scrutiny.  Electoral authorities set the presidential debate schedule. 

Politics: Recent economic trends, such as inflation, the exchange rate and the price of oil, are benefiting President Joko Widodo.  Employment is an area where the president remains vulnerable, but Prabowo Subianto’s new television ads on the topic may be backfiring.  Prabowo has focused on lamenting the lack of professional careers for college graduates – a remote concern for the bulk of voters (Page 2).  The General Election Commission (KPU) has secured agreements from the two presidential campaigns regarding topics and formats for televised debates in the coming months.  The challenge for Widodo will be to shield his running mate from questions on matters beyond his narrow field of Islamic jurisprudence (p. 2).  After prolonged wrangling with Gerindra, the Islamic Justice Welfare Party (PKS) finally named two nominees for vice governor of Jakarta; neither seem dynamic (p. 4). 

Surveys: President Joko Widodo’s 20 percentage-point lead remained intact through the second week of December, according to a credible poll (p. 5).  

Justice: Anti-Corruption Commission (KPK) officials are scrutinizing State Minister for Sports and Youth Imam Nahrawi, after having arrested a deputy state minister for alleged kickbacks on grants to the National Sports Committee (Koni).  The affair could become an embarrassment for Widodo (p. 5).  KPK officials indicated the likelihood of pursuing a former Lippo Cikarang president director, but they have not yet conveyed any such signals about investigating group owner James Riady (p. 6).  An NGO alliance highlights conflicts of interest on the part of Coordinating Maritime Affairs Minister Luhut Panjaitan (p. 7).

Policy News: Officials signed a comprehensive partnership (Cepa) with four European states (including Switzerland and Norway) (p. 9).  The transaction to nationalize the Freeport mine concluded on 21 December.  The deal will benefit Widodo (and perhaps him alone) (p. 10). 

Infrastructure: The linkage of the Trans Java Toll Road – first envisioned in 1978 – finally occurred on 20 December.  Opposition figures, noting that previous administrations had put the plans in place, dispute how much credit should accrue to Widodo; in fact, he was the first to expedite land acquisition and thereby overcome the chief obstacle (p. 12).  

4. India Monthly Report Nov-Dec 2018

The Indian indices have been seeing an ebb and flow with bearish indicators accounting for market dips with a recovery towards the end of the period. Overall the Indian indices have outperformed the global market this month with positive returns across sectors except for pharma and the metal sector.

Returns in USD

5. Japan – Policymakers Panicking, We Are Not

Japanese policymakers are panicking. Economic activity contracted in 3Q.  Inflation is slowing, up 0.8% YoY in December vs 1.4% YoY previously. Exports are flat lining. Unsurprisingly the BoJ left monetary policy unchanged this month while Abe’s cabinet, taking no chances approved a record initial budget for fiscal 2019 this week. We see few real signs of the economy slowing yet though. We remain overweight Japanese equities and are forecasting 1% nominal GDP growth in 2019, the same as the first three quarters of 2018.

In this briefing:

1. Campaign Sparring Re: Islam / KPK on PLN / Gov’t Wants Unicorn IPOs / Loan Growth Uptick / WB on FDI
2. Philippine Monetary Policy: Relief from No Rate Hike
3. Preview: BoE Stuck in the Brexit Quagmire

1. Campaign Sparring Re: Islam / KPK on PLN / Gov’t Wants Unicorn IPOs / Loan Growth Uptick / WB on FDI

The Prabowo-Uno campaign are focusing on Central Java while elements on both fringes of the religious spectrum debate poligamy and whether Widodo is ‘criminalizing’ clerics.  The KPK is investigating the head of the State Power Company (PLN) after court convicted BlackGold owner Johannes Kotjo.  Information Minister Rudiantara wants IPOs for four giant startups.  BI cited positive macro indicators, including 13% October credit expansion, but the World Bank warned that FDI inflows are too low. 

2. Philippine Monetary Policy: Relief from No Rate Hike

• In yesterday’s Monetary Board (MB) meeting (December 13), policymakers decided to maintain the policy rate at 4.75%. Receding price pressures on easing constraints on food supply, steady inflation expectations and BSP’s inflation forecasts showing a lower path over the policy horizon supported an unchanged policy setting.

• The MB stated that its pause also allows time for the recent policy rate adjustments to ‘work their way through the economy’. We interpret this as giving time for the recent tightening actions (cumulative 175bp rate hike), low oil price effects, and liberal rice imports with the passage of the rice tarrification bill to work their magic in anchoring inflation expectations to within the BSP’s preferred range.

• We sense the risk of large macro imbalances next year with a trade deficit of 15%-16% of GDP, could spook inflation expectations.  This could happen with a large trade gap provoking PHP to drift to historic highs of 55-56 even with an easing inflation print. Inflation expectations may take its time reverting to the BSP’s inflation target band. While there’s risk of a BSP rate adjustment if macro imbalances worsen, it won’t be of the ‘sequential’ kind that we witnessed this year. 

• While a weaker PHP outlook would prevail next year, risk of interest rates staying elevated would be driven more by potential liquidity tightness in line with widening investment-savings gap of both the public and private sectors (defines the larger trade/current shortfall). It’s a value proposition if ever the long end of the curve drifts up to 8% if not more. A compressed yield curve in which bond yields slip to less than 7% would constitute a clear sell signal in our view.

3. Preview: BoE Stuck in the Brexit Quagmire

• Excess UK demand and inflation continue to put hawkish pressures on the MPC, but Brexit uncertainty justifies postponing a more hawkish signal or action.
• I expect the MPC to vote for no change in policy unanimously and not prepare for a Feb-19 rate hike. A May move is a more likely but still state-dependent outcome.

In this briefing:

1. IDR, CPI, Oil, Trans-Java & Freeport Strengthen Widodo / Lippo Case Escalates / Efta Cepa / Debates
2. India Monthly Report Nov-Dec 2018
3. Japan – Policymakers Panicking, We Are Not
4. FLASH: BoE Blocked by Brexit Uncertainty
5. FLASH: UK Retail Surges into Christmas 2018

1. IDR, CPI, Oil, Trans-Java & Freeport Strengthen Widodo / Lippo Case Escalates / Efta Cepa / Debates

Prabowo has yet to dent Widodo’s 20-point lead in polls and, meanwhile, certain key macro-economic figures are finally swinging in the incumbent’s favor.  Jakarta and Surabaya are linked by toll road — after decades of work.  The Freeport mine nationalization went through, benefiting Widodo (but possibly no one else).  The Efta Cepa bodes well for other trade agreements in the works.  The Lippo Group scandal is escalating, but not yet affecting James Riady.  PT Toba Sejahtera Tbk suffered damaging NGO scrutiny.  Electoral authorities set the presidential debate schedule. 

Politics: Recent economic trends, such as inflation, the exchange rate and the price of oil, are benefiting President Joko Widodo.  Employment is an area where the president remains vulnerable, but Prabowo Subianto’s new television ads on the topic may be backfiring.  Prabowo has focused on lamenting the lack of professional careers for college graduates – a remote concern for the bulk of voters (Page 2).  The General Election Commission (KPU) has secured agreements from the two presidential campaigns regarding topics and formats for televised debates in the coming months.  The challenge for Widodo will be to shield his running mate from questions on matters beyond his narrow field of Islamic jurisprudence (p. 2).  After prolonged wrangling with Gerindra, the Islamic Justice Welfare Party (PKS) finally named two nominees for vice governor of Jakarta; neither seem dynamic (p. 4). 

Surveys: President Joko Widodo’s 20 percentage-point lead remained intact through the second week of December, according to a credible poll (p. 5).  

Justice: Anti-Corruption Commission (KPK) officials are scrutinizing State Minister for Sports and Youth Imam Nahrawi, after having arrested a deputy state minister for alleged kickbacks on grants to the National Sports Committee (Koni).  The affair could become an embarrassment for Widodo (p. 5).  KPK officials indicated the likelihood of pursuing a former Lippo Cikarang president director, but they have not yet conveyed any such signals about investigating group owner James Riady (p. 6).  An NGO alliance highlights conflicts of interest on the part of Coordinating Maritime Affairs Minister Luhut Panjaitan (p. 7).

Policy News: Officials signed a comprehensive partnership (Cepa) with four European states (including Switzerland and Norway) (p. 9).  The transaction to nationalize the Freeport mine concluded on 21 December.  The deal will benefit Widodo (and perhaps him alone) (p. 10). 

Infrastructure: The linkage of the Trans Java Toll Road – first envisioned in 1978 – finally occurred on 20 December.  Opposition figures, noting that previous administrations had put the plans in place, dispute how much credit should accrue to Widodo; in fact, he was the first to expedite land acquisition and thereby overcome the chief obstacle (p. 12).  

2. India Monthly Report Nov-Dec 2018

The Indian indices have been seeing an ebb and flow with bearish indicators accounting for market dips with a recovery towards the end of the period. Overall the Indian indices have outperformed the global market this month with positive returns across sectors except for pharma and the metal sector.

Returns in USD

3. Japan – Policymakers Panicking, We Are Not

Japanese policymakers are panicking. Economic activity contracted in 3Q.  Inflation is slowing, up 0.8% YoY in December vs 1.4% YoY previously. Exports are flat lining. Unsurprisingly the BoJ left monetary policy unchanged this month while Abe’s cabinet, taking no chances approved a record initial budget for fiscal 2019 this week. We see few real signs of the economy slowing yet though. We remain overweight Japanese equities and are forecasting 1% nominal GDP growth in 2019, the same as the first three quarters of 2018.

4. FLASH: BoE Blocked by Brexit Uncertainty

• The MPC voted unanimously for no policy change in December, as widely expected.
• Near-term GDP growth and inflation forecasts were both trimmed, but the extent may have been exaggerated by missing some recent news.
• Judging the appropriate policy stance was deemed to depend on the data in light of Brexit clarity. That should have occurred in time for a May-19 hike, in my view.

5. FLASH: UK Retail Surges into Christmas 2018

• UK retail sales surged by 1.2% m-o-m in Nov-18, which takes the level well above trend. Black Friday sales helped but discounting is not responsible.
• Sales in December have had a strong positive correlation with November since 2014. I pencil in +0.5% m-o-m before sales normalise lower in the new year.
• The latest rise raises my Nov-18 monthly GDP forecast to 0.2% m-o-m and removes the downside risk to my 0.3% q-o-q forecast for 4Q18.

In this briefing:

1. Preview: BoE Stuck in the Brexit Quagmire

1. Preview: BoE Stuck in the Brexit Quagmire

• Excess UK demand and inflation continue to put hawkish pressures on the MPC, but Brexit uncertainty justifies postponing a more hawkish signal or action.
• I expect the MPC to vote for no change in policy unanimously and not prepare for a Feb-19 rate hike. A May move is a more likely but still state-dependent outcome.

In this briefing:

1. Japan – Policymakers Panicking, We Are Not
2. FLASH: BoE Blocked by Brexit Uncertainty
3. FLASH: UK Retail Surges into Christmas 2018
4. FLASH: UK Nov-18 Inflation Slows as Expected
5. Time-Out Not Time up for Trade War

1. Japan – Policymakers Panicking, We Are Not

Japanese policymakers are panicking. Economic activity contracted in 3Q.  Inflation is slowing, up 0.8% YoY in December vs 1.4% YoY previously. Exports are flat lining. Unsurprisingly the BoJ left monetary policy unchanged this month while Abe’s cabinet, taking no chances approved a record initial budget for fiscal 2019 this week. We see few real signs of the economy slowing yet though. We remain overweight Japanese equities and are forecasting 1% nominal GDP growth in 2019, the same as the first three quarters of 2018.

2. FLASH: BoE Blocked by Brexit Uncertainty

• The MPC voted unanimously for no policy change in December, as widely expected.
• Near-term GDP growth and inflation forecasts were both trimmed, but the extent may have been exaggerated by missing some recent news.
• Judging the appropriate policy stance was deemed to depend on the data in light of Brexit clarity. That should have occurred in time for a May-19 hike, in my view.

3. FLASH: UK Retail Surges into Christmas 2018

• UK retail sales surged by 1.2% m-o-m in Nov-18, which takes the level well above trend. Black Friday sales helped but discounting is not responsible.
• Sales in December have had a strong positive correlation with November since 2014. I pencil in +0.5% m-o-m before sales normalise lower in the new year.
• The latest rise raises my Nov-18 monthly GDP forecast to 0.2% m-o-m and removes the downside risk to my 0.3% q-o-q forecast for 4Q18.

4. FLASH: UK Nov-18 Inflation Slows as Expected

• UK inflation matched Consensus expectations in Nov-18 as it slowed to 2.3% on the CPI and 3.2% on the RPI with the index printing at 284.6.
• Food price inflation slowed sharply, consistent with my proprietary pricing data. Beer and tobacco prices were stronger than I expected, but both were broadly in line with my new database, which I intend to assign more weight to incrementally.
• Further falls in headline inflation are likely to occur in the coming months. An earlier December index date would weigh on airfares, and Ofgem’s energy cap comes into force for January. Sub-2% inflation currently looks likely through 2019.

5. Time-Out Not Time up for Trade War

• Xi and Trump walk away from Buenos Aires with something to sell at home
• But trade negotiations will be dominated by fraught disagreements
• After 90-day negotiations, further delays to tariff escalation are likely 

In this briefing:

1. Fed Policy in 2019: Low Inflation Complicates an Uncertain Outlook
2. Thailand: The Sandbox
3. 2019 U.S. Growth and Employment Outlook
4. A Reality Check of the U.S. Economic Data Amid Market Volatility
5. Preview: UK Disinflation Again in Nov-18

1. Fed Policy in 2019: Low Inflation Complicates an Uncertain Outlook

The current tone of incoming US economic data is, once again, at variance with the behavior of financial markets, whereby the data dynamic is in apparent reversal of the disconnect that prevailed when the Fed deployed ultra-accommodative policy settings.

Fed Chair Powell will not wish to convey the impression that policy is being dictated by financial markets, while firm labour demand would seemingly rule out a pause in rate hikes.

As 2019 unfolds, the persistence of low inflation, despite faster economic growth, could potentially offer the Fed some breathing space to pause raising the federal funds rate at the Federal Open Market Committee (FOMC) meeting in March.

The long-standing dichotomy in inflation trends for goods and services remains intact, while the FOMC will be paying careful attention to prospective movements in rental costs and health care for indications of future inflation momentum.

Although falling oil prices may have helped to keep inflationary expectations well-anchored, Fed policy credibility and the rising dollar exchange rate probably played more dominant roles.

The US monetary policy outlook in 2019 will become more uncertain due to a confluence of factors, but the FOMC will require faltering economic data in Q1 to justify a pause in raising the federal funds rate in March.

2. Thailand: The Sandbox

3. 2019 U.S. Growth and Employment Outlook

• In 2018, the U.S. economy experienced aggregate demand outstripping aggregate supply and output growth exceeding potential.  We expect the same themes to hold in 2019 with real GDP growth at 2.7% and the unemployment rate falling to 3.3%.
• We expect aggregate demand growth to be led by a pickup in investment spending as the benefits of the December 2017 tax cut continue to filter through and as we look for some resolution on trade and tariff issues between the U.S. and China.
• There is evidence that the potential growth rate of the economy is rising but we still see 2.7% growth as being faster than potential, which we currently put at 2.1%.  In addition to a continued decline in unemployment in 2019 we look for a rising real trade deficit.
• For 2020, we see real GDP growth at 2.4% and the unemployment rate drifting lower to 3.1%.

4. A Reality Check of the U.S. Economic Data Amid Market Volatility

With the continued gyrations in the equity market and the drop in bond yields, we thought it would be worthwhile to do a quick scrub of the latest news on the U.S. economy to provide a crosscheck on the message from markets.

5. Preview: UK Disinflation Again in Nov-18

• UK CPI inflation has been biased to disappoint expectations this year, and I am marginally below Consensus for the upcoming Nov-18 at 2.24% y-o-y.
• Recreation and transport prices subtract the most from my projections, but food price judgements were the overlaid assessment that triggered my forecasts to round down recently. Observed changes in about 12,000 prices drove this decision.

In this briefing:

1. The Year of Dithering Dangerously
2. Macro Debt Risks in China According to the PBOC
3. FLASH: UK’s No-Confidence Vote in May Day

1. The Year of Dithering Dangerously

President Joko Widodo, cabinet-level policymakers and the broader political elite are neglecting the imperative for economic reform at a particularly critical juncture.  Prospects for improvement in a second Widodo term are questionable. 

2. Macro Debt Risks in China According to the PBOC

If there is one thing China is acutely aware of it is the debt risks.  For many years, I questioned whether China even understood the enormity of its debt risks.  Due to a number of factors, I have actually become quite convinced that yes they do understand these debt risks.  It should be emphasized that just because they understand the size and enormity of the debt risks does not mean they are going to take corrective steps that in normal financial markets we would expect (I will return to this point later).  However, they do clearly grasp the underlying risks of the debt buildup.

3. FLASH: UK’s No-Confidence Vote in May Day

• The threshold for a confidence vote in UK Prime Minister Theresa May has been triggered and will be held at 6pm GMT, with results available at about 9pm. I expect Conservative MPs to oust May now rather than be bound to keep her as Leader for another year.
• It is likely to be a close vote. Either way, the political outlook will change. Replacing Theresa May would take a few weeks and would raise the risk of a managed “no deal” Brexit, as candidates compete for the Eurosceptic membership.

In this briefing:

1. FLASH: BoE Blocked by Brexit Uncertainty
2. FLASH: UK Retail Surges into Christmas 2018
3. FLASH: UK Nov-18 Inflation Slows as Expected
4. Time-Out Not Time up for Trade War
5. Fed Policy in 2019: Low Inflation Complicates an Uncertain Outlook

1. FLASH: BoE Blocked by Brexit Uncertainty

• The MPC voted unanimously for no policy change in December, as widely expected.
• Near-term GDP growth and inflation forecasts were both trimmed, but the extent may have been exaggerated by missing some recent news.
• Judging the appropriate policy stance was deemed to depend on the data in light of Brexit clarity. That should have occurred in time for a May-19 hike, in my view.

2. FLASH: UK Retail Surges into Christmas 2018

• UK retail sales surged by 1.2% m-o-m in Nov-18, which takes the level well above trend. Black Friday sales helped but discounting is not responsible.
• Sales in December have had a strong positive correlation with November since 2014. I pencil in +0.5% m-o-m before sales normalise lower in the new year.
• The latest rise raises my Nov-18 monthly GDP forecast to 0.2% m-o-m and removes the downside risk to my 0.3% q-o-q forecast for 4Q18.

3. FLASH: UK Nov-18 Inflation Slows as Expected

• UK inflation matched Consensus expectations in Nov-18 as it slowed to 2.3% on the CPI and 3.2% on the RPI with the index printing at 284.6.
• Food price inflation slowed sharply, consistent with my proprietary pricing data. Beer and tobacco prices were stronger than I expected, but both were broadly in line with my new database, which I intend to assign more weight to incrementally.
• Further falls in headline inflation are likely to occur in the coming months. An earlier December index date would weigh on airfares, and Ofgem’s energy cap comes into force for January. Sub-2% inflation currently looks likely through 2019.

4. Time-Out Not Time up for Trade War

• Xi and Trump walk away from Buenos Aires with something to sell at home
• But trade negotiations will be dominated by fraught disagreements
• After 90-day negotiations, further delays to tariff escalation are likely 

5. Fed Policy in 2019: Low Inflation Complicates an Uncertain Outlook

The current tone of incoming US economic data is, once again, at variance with the behavior of financial markets, whereby the data dynamic is in apparent reversal of the disconnect that prevailed when the Fed deployed ultra-accommodative policy settings.

Fed Chair Powell will not wish to convey the impression that policy is being dictated by financial markets, while firm labour demand would seemingly rule out a pause in rate hikes.

As 2019 unfolds, the persistence of low inflation, despite faster economic growth, could potentially offer the Fed some breathing space to pause raising the federal funds rate at the Federal Open Market Committee (FOMC) meeting in March.

The long-standing dichotomy in inflation trends for goods and services remains intact, while the FOMC will be paying careful attention to prospective movements in rental costs and health care for indications of future inflation momentum.

Although falling oil prices may have helped to keep inflationary expectations well-anchored, Fed policy credibility and the rising dollar exchange rate probably played more dominant roles.

The US monetary policy outlook in 2019 will become more uncertain due to a confluence of factors, but the FOMC will require faltering economic data in Q1 to justify a pause in raising the federal funds rate in March.

In this briefing:

1. FLASH: UK Nov-18 Inflation Slows as Expected
2. Time-Out Not Time up for Trade War
3. Fed Policy in 2019: Low Inflation Complicates an Uncertain Outlook
4. Thailand: The Sandbox
5. 2019 U.S. Growth and Employment Outlook

1. FLASH: UK Nov-18 Inflation Slows as Expected

• UK inflation matched Consensus expectations in Nov-18 as it slowed to 2.3% on the CPI and 3.2% on the RPI with the index printing at 284.6.
• Food price inflation slowed sharply, consistent with my proprietary pricing data. Beer and tobacco prices were stronger than I expected, but both were broadly in line with my new database, which I intend to assign more weight to incrementally.
• Further falls in headline inflation are likely to occur in the coming months. An earlier December index date would weigh on airfares, and Ofgem’s energy cap comes into force for January. Sub-2% inflation currently looks likely through 2019.

2. Time-Out Not Time up for Trade War

• Xi and Trump walk away from Buenos Aires with something to sell at home
• But trade negotiations will be dominated by fraught disagreements
• After 90-day negotiations, further delays to tariff escalation are likely 

3. Fed Policy in 2019: Low Inflation Complicates an Uncertain Outlook

The current tone of incoming US economic data is, once again, at variance with the behavior of financial markets, whereby the data dynamic is in apparent reversal of the disconnect that prevailed when the Fed deployed ultra-accommodative policy settings.

Fed Chair Powell will not wish to convey the impression that policy is being dictated by financial markets, while firm labour demand would seemingly rule out a pause in rate hikes.

As 2019 unfolds, the persistence of low inflation, despite faster economic growth, could potentially offer the Fed some breathing space to pause raising the federal funds rate at the Federal Open Market Committee (FOMC) meeting in March.

The long-standing dichotomy in inflation trends for goods and services remains intact, while the FOMC will be paying careful attention to prospective movements in rental costs and health care for indications of future inflation momentum.

Although falling oil prices may have helped to keep inflationary expectations well-anchored, Fed policy credibility and the rising dollar exchange rate probably played more dominant roles.

The US monetary policy outlook in 2019 will become more uncertain due to a confluence of factors, but the FOMC will require faltering economic data in Q1 to justify a pause in raising the federal funds rate in March.

4. Thailand: The Sandbox

5. 2019 U.S. Growth and Employment Outlook

• In 2018, the U.S. economy experienced aggregate demand outstripping aggregate supply and output growth exceeding potential.  We expect the same themes to hold in 2019 with real GDP growth at 2.7% and the unemployment rate falling to 3.3%.
• We expect aggregate demand growth to be led by a pickup in investment spending as the benefits of the December 2017 tax cut continue to filter through and as we look for some resolution on trade and tariff issues between the U.S. and China.
• There is evidence that the potential growth rate of the economy is rising but we still see 2.7% growth as being faster than potential, which we currently put at 2.1%.  In addition to a continued decline in unemployment in 2019 we look for a rising real trade deficit.
• For 2020, we see real GDP growth at 2.4% and the unemployment rate drifting lower to 3.1%.

In this briefing:

1. Campaign Sparring Re: Islam / KPK on PLN / Gov’t Wants Unicorn IPOs / Loan Growth Uptick / WB on FDI
2. Philippine Monetary Policy: Relief from No Rate Hike
3. Preview: BoE Stuck in the Brexit Quagmire
4. FLASH: UK Back to Brussels with Bruises
5. The Year of Dithering Dangerously

1. Campaign Sparring Re: Islam / KPK on PLN / Gov’t Wants Unicorn IPOs / Loan Growth Uptick / WB on FDI

The Prabowo-Uno campaign are focusing on Central Java while elements on both fringes of the religious spectrum debate poligamy and whether Widodo is ‘criminalizing’ clerics.  The KPK is investigating the head of the State Power Company (PLN) after court convicted BlackGold owner Johannes Kotjo.  Information Minister Rudiantara wants IPOs for four giant startups.  BI cited positive macro indicators, including 13% October credit expansion, but the World Bank warned that FDI inflows are too low. 

2. Philippine Monetary Policy: Relief from No Rate Hike

• In yesterday’s Monetary Board (MB) meeting (December 13), policymakers decided to maintain the policy rate at 4.75%. Receding price pressures on easing constraints on food supply, steady inflation expectations and BSP’s inflation forecasts showing a lower path over the policy horizon supported an unchanged policy setting.

• The MB stated that its pause also allows time for the recent policy rate adjustments to ‘work their way through the economy’. We interpret this as giving time for the recent tightening actions (cumulative 175bp rate hike), low oil price effects, and liberal rice imports with the passage of the rice tarrification bill to work their magic in anchoring inflation expectations to within the BSP’s preferred range.

• We sense the risk of large macro imbalances next year with a trade deficit of 15%-16% of GDP, could spook inflation expectations.  This could happen with a large trade gap provoking PHP to drift to historic highs of 55-56 even with an easing inflation print. Inflation expectations may take its time reverting to the BSP’s inflation target band. While there’s risk of a BSP rate adjustment if macro imbalances worsen, it won’t be of the ‘sequential’ kind that we witnessed this year. 

• While a weaker PHP outlook would prevail next year, risk of interest rates staying elevated would be driven more by potential liquidity tightness in line with widening investment-savings gap of both the public and private sectors (defines the larger trade/current shortfall). It’s a value proposition if ever the long end of the curve drifts up to 8% if not more. A compressed yield curve in which bond yields slip to less than 7% would constitute a clear sell signal in our view.

3. Preview: BoE Stuck in the Brexit Quagmire

• Excess UK demand and inflation continue to put hawkish pressures on the MPC, but Brexit uncertainty justifies postponing a more hawkish signal or action.
• I expect the MPC to vote for no change in policy unanimously and not prepare for a Feb-19 rate hike. A May move is a more likely but still state-dependent outcome.

4. FLASH: UK Back to Brussels with Bruises

• Theresa May won the confidence of her parliamentary party by 200 votes to 117 after pledging to hand over before the next election and suggesting an early exit.
• Large-scale opposition to her leadership diminishes authority, but an inability to re-challenge her for a year provides some space for pivoting even softer if needed.
• Attempts to improve the backstop can now resume. A stated intent to make it a deal the DUP can tolerate makes it much more challenging to fix swiftly.
• Unless the European Council sounds surprisingly open to change tomorrow, talks are likely to drag on and deprive the BoE of the clarity needed to hike in Feb-19.

5. The Year of Dithering Dangerously

President Joko Widodo, cabinet-level policymakers and the broader political elite are neglecting the imperative for economic reform at a particularly critical juncture.  Prospects for improvement in a second Widodo term are questionable.