Macro

• EM Liquidity remains low but again pushed higher in November and looks set to rebound strongly in 2023, helped easier Chinese monetary conditions
• World economy skidding badly and probably already in recession. EM investor positioning data already discounts much of this drop. Capital outflows becoming far less negative.
• Weaker US dollar likely to add support to EM, gold and commodities in 2023. Many commodity-rich EMs look attractive.

• Chair Powell is not expecting a rapid decline in broad-based core inflationary pressures in 2023, thereby making it impossible to contemplate cutting the policy rate next year.
• The bulk of risks for 2023 are skewed to the downside due to potentially more deeply-entrenched inflationary pressures and continued geopolitical fallout impacting energy prices.
• Asia Pacific countries reliant on external demand will be impacted by downside outcomes in the US and Europe, while net importers of food and energy will face domestic demand pressures.  

• Despite evidence of a hawkish Fed outlook, the market has chosen to fight the Fed by loosening financial conditions. Should investors join in to fight the Fed?
• In the face of a hawkish Fed, it pays to be more cautious and maintain a balanced view of risk and return.
• Investors seeking exposure to U.S. equities will find better value in mid- and small-cap stocks.

• Singapore state-controlled port operator PSA International is considering selling its 20% stake in the port business of Hong Kong conglomerate CK Hutchison Holdings Ltd., according to people close to PSA’s controlling shareholder Temasek Holdings.
• PSA is reviewing its portfolio against the backdrop of geopolitical change and declining global trade demand, the sources said. 
• The port operator bought its 20% CK Hutchison stake in 2006 for $4.4 billion.

• FOMC hiked the Fed Funds rate 50bp to 4.25-4.5% as expected, and raised the median forecast to 5.1% for end-2023. We still expect a 5% peak in Mar’23.
• M2 grew faster in Mar’20-Feb’22 than in any month for a century. But M2 decelerated to 1.25%YoY growth in Oct’22, so core PCE inflation will ease to 3.5% by Mar’23.
• The steeply inverted yield curve and ISM new orders (<50 for 3 months) make recession inevitable by Q2/2023. Core Inflation at 2.5%YoY will bring a 25bp rate cut in Jul’23.   

Railway /: In Depth: How China helped build Indonesia’s high-speed rail

Covid-19 /: China’s demand for Pfizer’s Paxlovid skyrockets, but supplies are limited

IPOs /Chart of the Day: Chinese bourses top IPO league tables

• The final EA HICP inflation print raised the headline by 3bps in Nov-22, causing it to round to 10.1%. Italian energy and core news among smaller states drove the change.
• Underlying inflationary impulses are diverging, with Germany and France near their peaks while Spain slows. These pressures all remain inconsistent with the target.
• Tolerance for persistently high inflation is running low, encouraging the ECB to sustain its forceful hikes. Further falls in headline rates should not be mistaken for victory.

• After another 50bp from the Fed, we believe that the major impact of changes in expectations of the Fed will now be via the $ rather than via capital markets – the discount rate already having had its impact.
• So too with the ECB; this time a year ago everyone’s favourite synchronised swimmer and Lawyer, Christine Lagarde effectively ruled out any rate rises in 2022, in contrast to market expectations, before, in synch swimming parlance, the ECB performed its part in a perfect Cadence Action of central banks raising rates all year.
• Today she said that the ECB now needs to do more on rates than markets are pricing in, seeming to indicate a break from the Fed.

• Retail sales disappointed an overly optimistic consensus as levels normalised after the Amazon Prime Early Access sale. The declining trend remains intact.
• Real wage trends are declining and taking consumption with it as inflation erodes even high nominal spending, although values fell by 0.5% 3m-o-3m in Nov-22.
• Surging mortgage rates have collapsed confidence in the housing market, causing prices to start declining. Associated consumer spending will also take a hit soon.

Covid-19 /: Chinese mainlanders rush to Macao for mRNA vaccinations

Crypto /: Hong Kong readies crypto futures ETFs for retail investors

China-India /: China calls India border situation ‘generally stable’

• To explain what happened today with the FOMC meeting, we need a short step back.
• The latest US CPI release materially surprised on the downside: both headline and core inflation rose way below the expectations of 65 out of the 67 (!) economists surveyed by Bloomberg.
• Powell recently divided inflationary pressures in 3 main categories

• The BoE hiked by 50bps to 3.5% in Dec-22, as widely expected. Tenreyro and Dhingra dissented for no change, but Mann offset the dovish signal with another 75bp vote.
• MPC members no longer describe market pricing as too high. Most expect to hike further and are open to doing so forcefully again.
• With the Fed and ECB unlikely to slow again yet, and excessive inflationary pressures building, we now expect the BoE to hike by 50bp in Feb-23 rather than 25bps.

• The ECB followed its peers by slowing to a 50bps hiking pace in December, but it asserted hawkish bias by signalling that it will sustain this pace into 2023.
• Underlying inflation is excessively high enough for the staff forecast to persist above the target until 2025. The market may not be pricing enough sustained tightening.
• We now expect the ECB to hike by 50bps at its February and March meetings before slowing again to 25bps in May as it approaches a 3.25% deposit rate peak.

• Travel tracking /: China unplugs travel tracking system as Covid curbs ease
• Covid-19 /: Beijing beefs up health care system to handle Covid surge
• Finance and economy /: China and Saudi Arabia agree on $50 billion of deals

• UK inflation eased in Nov-22 to 10.7% and 14% on the CPI and RPI. An extremely early collection date is probably partly to blame for the broadly less intense outcome. 
• Underlying inflationary pressures remain excessively high, despite the monthly impulse in the median rate falling from its peak as expected. 
• We still see inflation past its peak but likely to remain persistently above the target. UK monetary policy will need to tighten further and is unlikely to reverse until 2024.

• The UK unemployment rate rose again to 3.67% in Oct-22. The 3-month change in the single-month rate slowed to 0.2pp, so it remains consistent with 3.8% at yearend.
• Falling vacancies and rising redundancies confirm the turn in labour demand, which failed to absorb the recent increase in supply despite still being historically high.
• Government policy has encouraged bumper pay demands and second-round effects. The BoE should be worried by signs 5% is becoming the new 2% in pay awards for 2023.

Covid-19: Covid chaos at China’s hospitals as stringent control policy eases

Yuan: Xi seeks yuan settlement of China energy trades with Gulf states

Bonds: China to roll over $108 billion of special sovereign bonds

• As such, we were more than a little pleased to see that the authorities in the Hong Kong SAR have indeed announced some new reductions to the restrictions to travel, in particular in lifting the 0+3 limitations to visit bars and restaurants that, among other things, were limiting the ability of international investors to include Hong Kong SAR as part of a broader Asia business trip (admitted self interest here!).
• While some limited restrictions still remain, the direction of travel is clear and likely that a lot of focus will now be for full opening up to China for Chinese New Year (something Hong Kong SAR CEO John Lee has declared as something “I will do everything I can to facilitate”).
• Of course, the HSI has also been rallying since the end of October, helped in particular by the rebound to the China Internet stocks that were linked to the ADR capitulation – many of the stocks had listed on the HSI and thus had acted as a drag on the performance of the index as the ADRs were dumped by US investors (see Is US tax driving Chinese stocks?).

• Modi’s BJP won a landslide victory in Gujarat, but the Aam Aadmi Party makes a significant breakthrough in vote share, cementing its position as a national party.
• Congress wrests control of the Himachal Pradesh legislature, demonstrating that the party still has some fight in it despite its recent challenges. 
• Aam Aadmi also takes over the Delhi Municipal Corporation, its pitch of delivering public service benefits resonating with the Delhi electorate. 

• The Week That Was in ASEAN@Smartkarma is filled with an eclectic mix of differentiated, substantive, and actionable insights, macro and equity bottom-up, from across South East Asia. 
• The past week saw insights on Bank Central Asia, Aneka Gas, VinFast and plans to list in the US, I-Tail (ITC TB), and Jardine Cycle & Carriage 
• There were also macro insights on Malaysian politics and the risks with Vietnam’s economy plus an index rebalancing in the Philippines with DMCI Holdings to potentially benefit.

• The UK re-opened from another bank holiday and recovered a tenth more ground than expected by growing 0.5% m-o-m. It matched our view of the 3m-o-3m pace at -0.3%. 
• Upside news was in construction, where builders are racing against a policy deadline, and health services, where the ONS is poor adjusting for seasonal vaccinations. 
• Underlying trends remain on track for a recession, not helped by strikers ignoring this direction — nonetheless, we half the Q4 decline in our forecast to -0.2% q-o-q.

• The Federal Reserve has done a spectacular job of keeping inflation expectations “anchored” in this market, despite multi-decade high levels of inflation.
• From the perspective of the Federal Reserve, it’s important to have well-anchored inflation expectations because this can help to keep actual inflation close to the central bank’s target rate.
• When inflation expectations are well-anchored, households and businesses are more likely to base their decisions on the assumption that inflation will remain stable and close to the target rate. 

• Global Liquidity is at ‘maximum tightness’ and is already starting to inch higher. 2023 could see strong gains, as did 2001 following Y2K
• China’s PBoC has jump-started liquidity injections and the US Fed is again adding liquidity (US$109 billion). On top the weaker US dollar and oil prices will underpin rising liquidity
• Taking 2001 as the benchmark year for 2023: bonds will be flat and stocks at best range bound, but generally weak. Profits may suffer for another 15-18 months. 

• The resilience of the global economy to monetary tightening in 2022 should not be a major surprise given the lags in the policy transmission mechanism. 
• The risk of a policy mistake by the Fed will increase in 2023, particularly as more gradual increases in the federal funds rate are instituted. 
• China’s zero-tolerance policy towards COVID-19 has incurred significant economic costs, but future fiscal stimulus will be more selective due to issues about the impact on productivity and local government finances

• The Treasury bond market is turning up while the stock market is turning down, which is a condition that hasn’t been seen for much of this year.
• We believe this action is the market’s signal of weaker economic growth, which should be bond bullish and equity bearish.
• However, much of the short-term outlook will hinge on next week’s CPI report and FOMC meeting.

• The market is discounting a global recovery as equities are generally leading the rotation, with European equities the clear leader.
• China is a laggard and dragging down the performance of emerging market equities.
• U.S. large-cap growth is dragging down the performance of U.S. stocks.

• This short article will focus on answering a very relevant question: ok, recession, but is it already priced in?
• Over the last few weeks we kept hearing a recession has become consensus amongst analysts and market pundits, and onboarding consensus macro views at the wrong price in one’s portfolio can be a very expensive exercises.
• But we can do much more than rely on hearsay. Using different techniques, we can test to what extent a recession is priced in both in bonds and equity markets and derive actionable conclusions.

• Covid-19 / Chinese cities continue shift from ‘zero-Covid’.

• Gold / China reports first rise in gold reserves since 2019.

• Carbon / China’s local governments set out plans to meet 2030 peak carbon goal.

• Key weaknesses in China’s pandemic management are being remedied, setting the stage for a significant withdrawal of restrictions.
• This time is different: the Chinese government is starting to credibly signal that they are placing emphasis on the economy and citizens’ welfare.
• If risks are properly managed and policy easing continues, China’s growth in 2023 may surprise on the upside. 

• In this insight, we provide a back-testing of the end of mandatory lock-up periods data from Korea Securities Depository (KSD) in the past six months.
• Our back-testing suggests a 67% probability of the average share price performances of the top 3 market cap companies in each month data underperforming relative to KOSPI (10/15 time periods).
• Among these stocks, some of the big underperformers included Wemade Co., Ltd. (112040 KS), Sebitchem (107600 KS), and Iljin Hysolus (271940 KS).

• The idea behind Market Thinking is not to make macro predictions, but rather, as the subtitle states, to try and ‘make sense of the narrative’; to assess where the markets think they are and to assess whether that is either consistent or credible.
• To that end, this time a year ago, we put out a series of posts – ‘four problems and a solution’ where we looked at the real problem with Bonds – that they offered negative real yields in a world where rates were having to rise sooner or later and that they suffered from an illusion of risk management with a bar bell of cash and junk.
• As we put it : “Looking forward and with the prospect of tighter monetary policy and the certainty of higher price levels, we now find ourselves, after a decade of government intervention and misplaced risk management, asking what now is the role, if any, for bonds in long term investment portfolios?“

• After a 50 bp hike three times a row, RBI softened and increased the repo rate by 35 basis points to 6.25%.
• Consequently, the standing deposit facility (SDF) rate stands adjusted to 6%, and the marginal standing facility (MSF) rate and the Bank Rate to 6.50%
• The basic facts on the ground have not changed much since the last policy in September-end: global headwinds, inflationary pressures arising from both exogenous and endogenous sources, and adverse terms of trade balanced against an economy exhibiting nascent growth with all the growth engines – industrial, agricultural and service sectors – in early stages of combustion.

• In Depth: Beijing Stock Exchange fights to make its mark

• China eases quarantine rules, lifts travel test requirements in Covid policy overhaul

• Xi to visit Saudi Arabia to boost relations in the Middle East

• China relaxes restrictions on overseas loans so developers can repay dollar bonds. 

• Beijing scraps Covid test requirement for public places.

• Former Caixin deputy editor-in-chief Zhang Jin dies at 56.

• In this insight, we discuss the price performance actions of 31 stocks that have been rebalanced in both the KOSPI 200 and MSCI Korea Index in 2022.
• Of these 31 stocks, 18 of them are the KOSPI 200 index changes and 13 of them are for the MSCI Korea Index changes.
• Some alpha generating performances continue in terms of adding stocks to be included in the KOSPI 200 and MSCI Korea index rebalances and reducing stocks that could be excluded.

• Our monetary and credit system is USD-centric: the lion share of international debt, trade invoices, asset classes and FX volume is settled or denomnated in US Dollars.
• Funnily enough though, direct access to $ liquidity is only available to entities located in the United States but in a credit-based system the rest of the world also has an incentive to leverage in US Dollars to boost or enhance their global business models.
• That means European banks, Brazilian corporates or Japanese insurance companies which want to do global business will most likely get exposure to $-denominated assets and liabilities ($ debt) despite being domiciled outside the United States.