Macro

• The inexperience of the current generation of central bankers towards fighting inflation was brutally exposed in 2022, but financial markets have been reluctant to punish them in an overly-harsh manner. 
• The extended period of global monetary accommodation had negative consequences for banking profitability, particularly in the Eurozone and Japan, but ending cheap money will have different outcomes across regions.
• Tighter monetary policies in the Asia Pacific region and softening external demand mean that banking systems could face asset quality concerns when profitability has not fully recovered to pre-pandemic levels. 

• Technical internals have been pointing to a shift in leadership to value and cyclical sectors, indicating the emergence of cyclical green shoots.
• Further analysis of technical internals, as well as the macro picture, indicate that hope of a cyclical rebound may be an illusion.
• Macro and valuation risk are weighing on equity prices and downside risk remains.

• The markets reacted with a minor risk-on tone after the release of the November FOMC minutes, but it could be an over-reaction.
• Fed Chair Jerome Powell is scheduled to speak on the economy and labour markets on November 30.
• That speech is likely to set the tone for the markets for the coming weeks.

• Without properly understanding money, it’s basically impossible to connect the countless dots of the global macro puzzle.
• Yet, we assume we know all about money: universities and mainstream economic courses teach us that governments need money to fund their spending, Central Banks have the authority to print money we use, and commercial banks lend and multiply customers’ money in a fractional reserve banking system.
• That’s literally all wrong. Our monetary and credit system envisages two distinct tiers of money: real-economy money (potentially inflationary) and financial-sector money (potentially asset-price inflationary).

• Markets are right to hail Anwar’s appointment as PM, as his multi-racial vision fits perfectly with the federalist ideas that Sabah-Sarawak desire, which will lend stability to his government. 
• Anwar should have been Malaysia’s 5th PM, not its 10th. But his multi-racial approach, and commitment to fighting cronyism, support of the poor and simplicity among ministers have been consistent.
• Anwar seeks a cleaner, more internationally-linked and fiscally responsible Malaysia. With the levers of power in his hand, he will deliver this during a single 5-year term. We are bullish. 

• In Depth: Cosco alters course in the face of shipping headwinds.

• China plans to put nuclear-powered base on the moon by 2028.

• China’s ‘Big Six’ state banks offer developers $130 billion in credit lines.

• Data / In Depth: China’s struggle for data security. 

• Covid-19 / China fleshes out ‘optimized’ Covid-19 response.

• Pension / China’s personal pension system nears launch as insurers’ rules finalized.

• Differential surprises in the Nov-22 PMI surveys still reinforced the global trend towards falling activity. The US drop crystallised the convergence risk we flagged last month.
• Levels are consistent with broad Q4 activity declines, which would confirm a technical recession in the UK. Unemployment lags but is showing some signs of deterioration.
• Although there is arguably enough recessionary evidence for tightening to slow slightly in December, unemployment will need to have definitively turned for hikes to end.

• As my mentor used to say, any market practicioner can make headlines by screaming something wildly out-of-consensus but conveniently leaving the details of his forecast out of the equation.
• How many times have you heard that ‘‘the US Dollar will fall apart’’ or that ‘‘the real estate bubble will burst’’ over the last 10-20 years, yet without a clear time horizon for this call to play out?
• If only you got 1 USD (pun intended) for every time you heard something like this, you’ll be rich by now.

• President Xi Jinping appears willing to make important changes now that he has consolidated his power at the Chinese Communist Party’s 20th Congress 
• Substantial policy shifts have been announced in recent weeks in several areas – pandemic management, real estate support, migrant workers and foreign policy. Expect further shifts in 2023
• We do not see a major push on liberalizing economic reforms, but Xi will be aiming to boost China’s economic resilience to withstand potential American hostility. 

• The latest federal parliamentary elections have produced a hung parliament. Intense negotiations are underway to form the next coalition government
• Perikatan Nasional’s heavily ethno-nationalist campaign worked, making it the biggest winner in the election. It is now positioned as a major player in national politics.
• Malaysia’s political system is more polarized along ethnic, religious, and socio-economic lines. Questions will be asked whether the social fabric can withstand such fissures.

• Inflation surprises continue to skew higher as prices remain far below where firms would like them. Additional cost shocks have prevented the gap from closing at all yet.
• Government policy encourages second-round effects that raise the equilibrium price and cost-push inflation towards it over the next 18 months.
• This macro story raises inflationary trends in our forecast to be almost 2pp above the consensus. That is less than the 4pp gap in March but could still rise again.

In the next webinar, we have Smartkarma Insight Provider Phil Rush who will be giving us the full picture of inflation in Europe and its effects on the European economy. Have your burning questions answered in the live Q&A session that will follow after Phil’s presentation. 

The webinar will be hosted on Wednesday, 23 November 2022, 17:00 SGT/HKT.

Philip Rush is the Founder and Chief Economist of Heteronomics. Until launching in November 2016, he was Nomura’s Senior European Economist and was the Chief UK Economist there since 2010. Before that, he was UK Economist at Barclays Wealth, where he also developed strategic asset allocation models for their market return portfolios. Philip started his career at Lehman Brothers covering the UK, Scandinavian and Swiss economies. A book on his fundamental framework was published in January 2018 as “Real Market Economics”.

• 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 Selamat Sempurna (SMSM IJ),I-Tail (ITC TB), Grab (GRAB US), Sea Ltd (SE US),Bangkok Aviation Fuel Services (BAFS TB), and True Corp. 
• There were also macro insights on the Thai economy, Indonesia’s economy and the Malaysian elections.

• The Rabobank issued a research note last week where they forecasted that prices for agricultural commodities like coffee, feed grains and oilseeds could dip next year as many major economies enter recession, but also stated that they will remain high in historical terms.
• We think the general call is correct, but the timing isn’t. We already see this dip move playing out at the moment.
• Just take a look at coffee, cotton, oil, or copper. We believe this dip in the long-term cyclical bull market will end towards Q2 of 2022 before the rally in many commodity markets resumes again as demand strikes back.

• Covid-19 / China’s Covid caseload hits six-month high as big cities suffer flare-ups

• APEC / China, Japan to move quickly on maritime and air security hotline

• Caixin Summit / China’s growth is ‘too slow,’ says top state economist

• The better-than-expected October US consumer prices release has imparted hope in financial markets of a looming turning point in the conduct of US monetary policy. 
• History suggests the yield curve inversion since July indicates the onset of recession in 2023 H2, by which time the Fed should have an ample buffer to reduce interest rates. 
• The proponents of a higher Fed inflation target argue that the costs to the real economy of dogmatically pursuing a 2% goal are excessively high due to supply-side forces. 

• The recent risk-on episode is attributable to the combination of excessively bearish sentiment and a positive inflation surprise.
• Most of the effects of the buying stampede have likely dissipated.
• Technical conditions are weak and the bear market is poised to resume.

• The performance of balanced funds was challenging in 2022. You would have to go back to the Volcker Fed of 1980–1982 to see positive correlation between stock and bond prices.
• The good news is the inflection point should be just around the corner. 
• Positive correlation between stock and bond prices in 2022 should translate to a strong return recovery for balanced funds.

• In this business, we are often inundated by countless news headlines telling us all about what’s happening…now.
  
• It’s a never-ending process that invites market participants to spend time and energy dissecting how new information affects the investment landscape.
• For a macro investor though, every now and then taking a step back is crucial: with a 30,000-foot view, the macro big picture becomes increasingly clear.

• US Fed has injected a positive US$167bn into markets so far in Q4, 2022. This partly reverses the US$1.1 trillion they withdrew in year up to September
• Based on US Fed projections of a further US$1.5-2 trillion of QT liquidity withdrawals, the S&P500 could skid lower to 3200 (i.e. minus 20% from here)
• QT has stalled, showing the operational difficulty of withdrawing cash.  This may also reflect underlying concerns about US Treasury market liquidity. A pause/ pivot is coming, but its not now

• Although Anwar-led Pakatan Harapan (PH) won a plurality as we expected, the Islamist PAS unexpectedly emerged as the largest Malay party, winning 49 seats (vs UMNO’s 26 and Bersatu’s 24).
• PH could attempt to form coalition with the Borneo Bloc (28 seats) plus a few smaller parties. A stabler alliance would involve PH joining PAS, given their leaders’ ABIM pasts. 
• PN and BN could attempt to cobble an alternative alliance with the Borneo Bloc, but the latter will be wary of PAS being the largest party in it. Uncertainty ahead! 

• Retail sales rebounded slightly with the normalisation of working days after the Queen’s funeral. It also appeared to draw support from Amazon’s Prime Early Access sale.
• An end to that short sale should weigh on November, despite Black Friday, as it is already counted. We expect a brief dip below the bleak downward retail trend. 
• High inflation continues to squeeze real incomes and sales. Rising rates also depress disposable income and will probably push retail’s trend pace below real incomes.

• Over the last 30 days, a lot has happened under the surface in bond markets.
• And no, it’s not as simple as ‘‘bond markets now think the Fed will pivot’’.
• Let’s instead look into three interesting dimensions that carry a lot of informational value: curve slopes, volatility and implied Central Bank rates.

• In Depth: Rival ride-hailing apps challenge Didi in world’s biggest market

• Xi calls for improved China-Australia relations at G-20

• Indonesia IT minister plays up opportunities in country’s digital transformation

• The final print of EA HICP inflation trimmed the flash again in Oct-22 to 10.6%. Italy drove this revision, as we previewed last week, but it remains far too high.
• Underlying inflationary impulses have increased in some countries and are generally stuck near their highs. This resilience in the euro area remains a significant concern.
• We fear a repeat of the forecast drift pushing peak inflation higher, which would encourage the ECB to hike by 75bps again. So there are upside risks to our views.

• Vaccines / In Depth: What’s next for China’s Covid vaccine strategy?

• Students / Chinese student enrollment hits seven-year low in the U.S.

• Caixin Summit / IMF official says recalibrating ‘zero Covid’ is critical to China’s recovery

• Thailand Health Care is back in favour among active EM investors. 
• Average weights soar to all-time highs, driven by buying in Bumrungrad Hospital and Bangkok Dusit Medical Services
• This clear shift in sentiment could open the door for further investment from the 80% of managers who are yet to hold a position.

• UK inflation surged beyond our substantially above-consensus forecast to hit 11.1% on the CPI and 14.2% on the RPI in Oct-22. Food prices drove most of the upside for us.
• Underlying inflationary pressures remain far too high. The monthly impulse in the median rate is near its highs, as are the annual rates of most other metrics.
• We still see this as the peak, but repeating recent upside news could easily extend that further in the next few months. Energy price cap changes could also stoke Apr-23.