Macro

In this briefing:

1. Thailand: The Sandbox
2. 2019 U.S. Growth and Employment Outlook
3. A Reality Check of the U.S. Economic Data Amid Market Volatility
4. Preview: UK Disinflation Again in Nov-18
5. Huawei/Trade Truce Progress/ Made in China 2025 /China Cyber Threat/Stimulus

1. Thailand: The Sandbox

2. 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%.

3. 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.

4. 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.

5. Huawei/Trade Truce Progress/ Made in China 2025 /China Cyber Threat/Stimulus

China News That Matters

• Canada caught in the crossfire
• Soybean sales and other good news
• Downgrading the master plan. Or not
• China: the greatest threat to US privacy?
• Real estate firms seek bond green light

In this briefing:

1. Macro Debt Risks in China According to the PBOC
2. FLASH: UK’s No-Confidence Vote in May Day
3. China’s A-Share Market Comes of Age, Slowly
4. China PPI: Food Prices and Steel
5. US Treasury Market Switches Its Message to the Fed and Raises the Ante on Policy Conduct

1. 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.

2. 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.

3. China’s A-Share Market Comes of Age, Slowly

• The Shanghai-London Stock Connect is set to launch in December
• These new investment channels and MSCI inclusion transform a market long viewed as a casino
• Beijing’s distrust of markets still leaves shares subject to political whim
• Sheer size means China’s markets could dominate EM portfolios for years to come
• First-rate trading and settlement systems, but idiosyncratic listing procedures
• Institutional investors and foreigners still play a limited role
• High leverage has put wider economy at risk in event of a market crash

4. China PPI: Food Prices and Steel

The falling CPI and PPI matters for important reasons in that Chinese analysts are talking about potential deflation in 2019 absent stimulus. Overall the CPI increased 2.2% in YoY comparison. Food prices have slowed an overall increase, but some key sectors in food are sluggish and as a result a concern for us.

5. US Treasury Market Switches Its Message to the Fed and Raises the Ante on Policy Conduct

Bond investors have recently joined their equity counterparts and raised the ante on the Federal Open Market Committee (FOMC) to pause further increases in the federal funds rate.

Despite the lack of sufficient evidence that economic growth has reverted to a more sustainable footing, bond investors have reverted to playing the long-standing game of chicken with the FOMC about the economy’s ability to withstand members’ estimate of the neutral federal funds rate.

Concerns about yield curve inversion have recently returned, but investors are struggling to adjust to a more normal environment where short-term interest rate volatility is no longer being artificially suppressed by Fed policy.

The persistently low term premium demanded by bond investors has boosted financial accommodation at any given policy rate level, thereby raising the risks that the FOMC may still increase the federal funds rate even after the yield curve has become inverted in order to achieve sustainable growth.

East Asian economies have imparted a downward bias on US inflation and bond yields over the past 25 years and have consequently pushed the Fed into adopting more accommodative policy settings over the aforementioned period.

The FOMC needs unambiguous evidence of slowing jobs growth towards levels that alleviate downward pressure on the unemployment rate before contemplating a pause in hiking the federal funds rate at the March FOMC meeting.

In this briefing:

1. A Reality Check of the U.S. Economic Data Amid Market Volatility
2. Preview: UK Disinflation Again in Nov-18
3. Huawei/Trade Truce Progress/ Made in China 2025 /China Cyber Threat/Stimulus
4. Campaign Sparring Re: Islam / KPK on PLN / Gov’t Wants Unicorn IPOs / Loan Growth Uptick / WB on FDI
5. Philippine Monetary Policy: Relief from No Rate Hike

1. 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.

2. 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.

3. Huawei/Trade Truce Progress/ Made in China 2025 /China Cyber Threat/Stimulus

China News That Matters

• Canada caught in the crossfire
• Soybean sales and other good news
• Downgrading the master plan. Or not
• China: the greatest threat to US privacy?
• Real estate firms seek bond green light

4. 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. 

5. 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.

In this briefing:

1. Preview: BoE Stuck in the Brexit Quagmire
2. FLASH: UK Back to Brussels with Bruises
3. The Year of Dithering Dangerously
4. Macro Debt Risks in China According to the PBOC
5. FLASH: UK’s No-Confidence Vote in May Day

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.

2. 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.

3. 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. 

4. 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.

5. 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. China’s A-Share Market Comes of Age, Slowly
2. China PPI: Food Prices and Steel
3. US Treasury Market Switches Its Message to the Fed and Raises the Ante on Policy Conduct

1. China’s A-Share Market Comes of Age, Slowly

• The Shanghai-London Stock Connect is set to launch in December
• These new investment channels and MSCI inclusion transform a market long viewed as a casino
• Beijing’s distrust of markets still leaves shares subject to political whim
• Sheer size means China’s markets could dominate EM portfolios for years to come
• First-rate trading and settlement systems, but idiosyncratic listing procedures
• Institutional investors and foreigners still play a limited role
• High leverage has put wider economy at risk in event of a market crash

2. China PPI: Food Prices and Steel

The falling CPI and PPI matters for important reasons in that Chinese analysts are talking about potential deflation in 2019 absent stimulus. Overall the CPI increased 2.2% in YoY comparison. Food prices have slowed an overall increase, but some key sectors in food are sluggish and as a result a concern for us.

3. US Treasury Market Switches Its Message to the Fed and Raises the Ante on Policy Conduct

Bond investors have recently joined their equity counterparts and raised the ante on the Federal Open Market Committee (FOMC) to pause further increases in the federal funds rate.

Despite the lack of sufficient evidence that economic growth has reverted to a more sustainable footing, bond investors have reverted to playing the long-standing game of chicken with the FOMC about the economy’s ability to withstand members’ estimate of the neutral federal funds rate.

Concerns about yield curve inversion have recently returned, but investors are struggling to adjust to a more normal environment where short-term interest rate volatility is no longer being artificially suppressed by Fed policy.

The persistently low term premium demanded by bond investors has boosted financial accommodation at any given policy rate level, thereby raising the risks that the FOMC may still increase the federal funds rate even after the yield curve has become inverted in order to achieve sustainable growth.

East Asian economies have imparted a downward bias on US inflation and bond yields over the past 25 years and have consequently pushed the Fed into adopting more accommodative policy settings over the aforementioned period.

The FOMC needs unambiguous evidence of slowing jobs growth towards levels that alleviate downward pressure on the unemployment rate before contemplating a pause in hiking the federal funds rate at the March FOMC meeting.