It may not feel like it. It may not smell like it. But make no mistake Hong Kong is in recession. We are underweight in our relative regional equity portfolio. The only positives are that the real cost of lending is easing (which might bring some relief to mortgage owners) and Hong Kong corporate balance sheets are in good shape to weather the current downturn. But the negative overwhelm these positives.
Successful resolution of geopolitical issues pertaining to China’s continued integration into the world economy remains crucial for global corporate profit expectations and risky assets.
Uncertainty about the US economic outlook has increased in recent weeks as testified by falling corporate profit growth expectations, while the recent government shutdown has delayed the release of crucial data required for monetary policy formulation.
China’s economy continues to decelerate, as testified by slowing big ticket activity, but record monthly credit growth in January indicates how the fallout from the US trade dispute has diverted attention away from lowering excessive leverage in the economy, as well as rising bond defaults.
The US will insist that currency devaluation by China cannot be deployed under any Sino-US trade dispute resolution, but this will reduce China’s sovereignty over discretionary monetary policy conduct.
Meanwhile, rumours are circulating that the US wants to impose a Plaza Accord style memorandum for China to be committed to an orderly appreciation of the yuan as part of any trade dispute resolution, but China will be wary of the fate that befell Japan after 1985 following the Plaza agreement.
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The US-China trade dispute simmers on. Regardless of the outcome of talks between the two largest economies on earth, the damage to the existing world manufacturing trading order has already been done. China plus one is no longer a preferential industrial location strategy for multinational companies, it is an imperative. Like Brexit, companies are beginning to relocate out of China even before the dispute is either settled or escalated. Profits can’t wait for governments to behave sensibly.
But where to go? Indonesia and Vietnam are the most obvious potential beneficiaries of the fallout from the ongoing trade dispute between the US and China. There are a number of alternatives but Indonesia and Vietnam both have large, youthful working populations (and really here we are talking about the accessible workforces on Java and in Vietnam) and both are located within easy reach of the existing Asian supply chain. But are both equally ready and equally keen to pick up the China baton? Vietnam is the obvious winner in this contest. Unfortunately, for institutional equity investors the market isn’t included in Asia-Pacific or emerging market benchmarks.
The fact that the dollar has strengthened despite the dovish turn at the Fed this year and the significant fall in US rates and bond yields has confounded many analysts.
While the Fed and Treasury stabilized and strengthened the financial system following the financial crisis we think recent decisions by the Fed are increasing the risk of future instability. The Fed’s efforts to manage market volatility are potentially counterproductive and there are risks to addressing liquidity via abundant reserves concentrated at a few large banks. Researchers within the Federal Reserve systems have raised concerns but policymakers appear to be discounting these warnings.
The Federal Open Market Committee (FOMC) sought to further mitigate the fallout from last December’s rise in the federal funds rate by ignoring its own economic models, and, instead, embracing a more dovish outlook for the policy rate, as well as slowing the planned pace of its balance sheet roll off.
No further interest rate increases are envisaged by the FOMC in 2019, while any required in 2020 will not take policy settings into restrictive territory due to the imminent arrival of sustainable growth.
The persistently low inflation backdrop has permitted the Fed to embrace a dovish approach, but engineering a significant decline in real interest rates could prove problematic if the economy falters at some future point.
Fears about yield curve inversion and recession risks persist, despite the Fed’s dovish tilt, thereby potentially raising concerns about the overall credibility of monetary policy conduct.
US short-term interest rates are being anchored to a “new normal” environment of low inflation and slower economic growth compared to history, and, consequently, the bond market appears to have won its battle of wills with the FOMC by forcing members to reduce their estimate of the neutral federal funds rate.
Japan’s policymakers continue to fret about the lack of inflation but it is worth remembering the norm globally and historically is for the price of manufactured goods to decline over time. As companies grow, specialise and scale up the cost of production falls and with it final consumer goods prices. Falling retail prices which increase consumer real purchasing power is good news for Japanese households and for discretionary spending. Moreover with labour productivity growth outpacing wages costs by a wide margin, companies can absorb lower prices without sacrificing profitability. Stay overweight Japanese equities.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Successful resolution of geopolitical issues pertaining to China’s continued integration into the world economy remains crucial for global corporate profit expectations and risky assets.
Uncertainty about the US economic outlook has increased in recent weeks as testified by falling corporate profit growth expectations, while the recent government shutdown has delayed the release of crucial data required for monetary policy formulation.
China’s economy continues to decelerate, as testified by slowing big ticket activity, but record monthly credit growth in January indicates how the fallout from the US trade dispute has diverted attention away from lowering excessive leverage in the economy, as well as rising bond defaults.
The US will insist that currency devaluation by China cannot be deployed under any Sino-US trade dispute resolution, but this will reduce China’s sovereignty over discretionary monetary policy conduct.
Meanwhile, rumours are circulating that the US wants to impose a Plaza Accord style memorandum for China to be committed to an orderly appreciation of the yuan as part of any trade dispute resolution, but China will be wary of the fate that befell Japan after 1985 following the Plaza agreement.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
The fact that the dollar has strengthened despite the dovish turn at the Fed this year and the significant fall in US rates and bond yields has confounded many analysts.
While the Fed and Treasury stabilized and strengthened the financial system following the financial crisis we think recent decisions by the Fed are increasing the risk of future instability. The Fed’s efforts to manage market volatility are potentially counterproductive and there are risks to addressing liquidity via abundant reserves concentrated at a few large banks. Researchers within the Federal Reserve systems have raised concerns but policymakers appear to be discounting these warnings.
The Federal Open Market Committee (FOMC) sought to further mitigate the fallout from last December’s rise in the federal funds rate by ignoring its own economic models, and, instead, embracing a more dovish outlook for the policy rate, as well as slowing the planned pace of its balance sheet roll off.
No further interest rate increases are envisaged by the FOMC in 2019, while any required in 2020 will not take policy settings into restrictive territory due to the imminent arrival of sustainable growth.
The persistently low inflation backdrop has permitted the Fed to embrace a dovish approach, but engineering a significant decline in real interest rates could prove problematic if the economy falters at some future point.
Fears about yield curve inversion and recession risks persist, despite the Fed’s dovish tilt, thereby potentially raising concerns about the overall credibility of monetary policy conduct.
US short-term interest rates are being anchored to a “new normal” environment of low inflation and slower economic growth compared to history, and, consequently, the bond market appears to have won its battle of wills with the FOMC by forcing members to reduce their estimate of the neutral federal funds rate.
Japan’s policymakers continue to fret about the lack of inflation but it is worth remembering the norm globally and historically is for the price of manufactured goods to decline over time. As companies grow, specialise and scale up the cost of production falls and with it final consumer goods prices. Falling retail prices which increase consumer real purchasing power is good news for Japanese households and for discretionary spending. Moreover with labour productivity growth outpacing wages costs by a wide margin, companies can absorb lower prices without sacrificing profitability. Stay overweight Japanese equities.
The anticipated cut in the bank reserve ratio didn’t materialize in the latest Monetary Board (MB) meeting–the first one chaired by newly appointed BSP Gov. Benjamin Diokno. In the ANC televised interview, Diokno expressed his preference to reduce the high bank reserve requirement ratio (RRR: 18%) by 1% every quarter, fueling bond market excitement that severely compressed yields. The policy rate was also unchanged amid the dovish tone in the BSP’s press release after the meeting.
According to a senior monetary official, the RRR cut is a ‘live’ issue. That the timing of any adjustment is key given the operational and policy implications of an RRR cut.
Accentuating the MB’s depiction of benign inflation is an inflation trajectory settled comfortably in its target band in 2019-20 with inflation expectations close to being anchored within the band as well. Key downside risk to growth cited by the MB is the ‘current budget impasse in Congress is not resolved soon’. Prolonged El Niño is among those factors that can upset the broadly balanced risks to inflation.
A BSP under a pro-growth BSP chief need not necessarily change the ‘sequencing and timing’ of monetary policy decisions/actions facing liquidity and growth challenges. Likelihood that 1Q GDP (May 9 release) may be given slight emphasis in the BSP’s shift to accommodation starting with the bank reserve cut.
We expect a bond market correction following excitement over the BSP’s dovish pivot this early that led to severe yield compression. Buy the 5yrs to short-duration on dips.
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The 27 February sitting of UK political theatre now looks set to be a damp squib, with the main parliamentary clashes postponed to March.
The “meaningful vote” on the government’s tweaked Brexit deal is scheduled for 12 March. If a proper state-dependent break clause is contained in a codicil, it may pass. Otherwise, an extension request is likely to be approved on 14 March.
A short delay might become a long one and no Brexit. New government scheduling and Labour positioning slightly shift my probabilities of a deal, no deal, and no Brexit from 55:30:15 to 55:25:20. No deal remains the default even if delayed.
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Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
The 27 February sitting of UK political theatre now looks set to be a damp squib, with the main parliamentary clashes postponed to March.
The “meaningful vote” on the government’s tweaked Brexit deal is scheduled for 12 March. If a proper state-dependent break clause is contained in a codicil, it may pass. Otherwise, an extension request is likely to be approved on 14 March.
A short delay might become a long one and no Brexit. New government scheduling and Labour positioning slightly shift my probabilities of a deal, no deal, and no Brexit from 55:30:15 to 55:25:20. No deal remains the default even if delayed.
So we hear that President Trump may be doing something in Vietnam prior to the March 1 trade deadline. Even though Trump tweeted the tariffs will not be implemented on March 1, you can be sure that negotiations are still going at full speed. However, in the shadow of trade talks we are looking at China’s Flash numbers as an indicator of economic health.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
While the Fed and Treasury stabilized and strengthened the financial system following the financial crisis we think recent decisions by the Fed are increasing the risk of future instability. The Fed’s efforts to manage market volatility are potentially counterproductive and there are risks to addressing liquidity via abundant reserves concentrated at a few large banks. Researchers within the Federal Reserve systems have raised concerns but policymakers appear to be discounting these warnings.
The Federal Open Market Committee (FOMC) sought to further mitigate the fallout from last December’s rise in the federal funds rate by ignoring its own economic models, and, instead, embracing a more dovish outlook for the policy rate, as well as slowing the planned pace of its balance sheet roll off.
No further interest rate increases are envisaged by the FOMC in 2019, while any required in 2020 will not take policy settings into restrictive territory due to the imminent arrival of sustainable growth.
The persistently low inflation backdrop has permitted the Fed to embrace a dovish approach, but engineering a significant decline in real interest rates could prove problematic if the economy falters at some future point.
Fears about yield curve inversion and recession risks persist, despite the Fed’s dovish tilt, thereby potentially raising concerns about the overall credibility of monetary policy conduct.
US short-term interest rates are being anchored to a “new normal” environment of low inflation and slower economic growth compared to history, and, consequently, the bond market appears to have won its battle of wills with the FOMC by forcing members to reduce their estimate of the neutral federal funds rate.
Japan’s policymakers continue to fret about the lack of inflation but it is worth remembering the norm globally and historically is for the price of manufactured goods to decline over time. As companies grow, specialise and scale up the cost of production falls and with it final consumer goods prices. Falling retail prices which increase consumer real purchasing power is good news for Japanese households and for discretionary spending. Moreover with labour productivity growth outpacing wages costs by a wide margin, companies can absorb lower prices without sacrificing profitability. Stay overweight Japanese equities.
The anticipated cut in the bank reserve ratio didn’t materialize in the latest Monetary Board (MB) meeting–the first one chaired by newly appointed BSP Gov. Benjamin Diokno. In the ANC televised interview, Diokno expressed his preference to reduce the high bank reserve requirement ratio (RRR: 18%) by 1% every quarter, fueling bond market excitement that severely compressed yields. The policy rate was also unchanged amid the dovish tone in the BSP’s press release after the meeting.
According to a senior monetary official, the RRR cut is a ‘live’ issue. That the timing of any adjustment is key given the operational and policy implications of an RRR cut.
Accentuating the MB’s depiction of benign inflation is an inflation trajectory settled comfortably in its target band in 2019-20 with inflation expectations close to being anchored within the band as well. Key downside risk to growth cited by the MB is the ‘current budget impasse in Congress is not resolved soon’. Prolonged El Niño is among those factors that can upset the broadly balanced risks to inflation.
A BSP under a pro-growth BSP chief need not necessarily change the ‘sequencing and timing’ of monetary policy decisions/actions facing liquidity and growth challenges. Likelihood that 1Q GDP (May 9 release) may be given slight emphasis in the BSP’s shift to accommodation starting with the bank reserve cut.
We expect a bond market correction following excitement over the BSP’s dovish pivot this early that led to severe yield compression. Buy the 5yrs to short-duration on dips.
In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
So we hear that President Trump may be doing something in Vietnam prior to the March 1 trade deadline. Even though Trump tweeted the tariffs will not be implemented on March 1, you can be sure that negotiations are still going at full speed. However, in the shadow of trade talks we are looking at China’s Flash numbers as an indicator of economic health.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
So we hear that President Trump may be doing something in Vietnam prior to the March 1 trade deadline. Even though Trump tweeted the tariffs will not be implemented on March 1, you can be sure that negotiations are still going at full speed. However, in the shadow of trade talks we are looking at China’s Flash numbers as an indicator of economic health.
Last Friday China torpedoed Australia’s coal imports after announcing that the middle kingdom would no longer accept coal imports from Australia. This leads us to consider some of the energy issues related to China. We write often about coal and the importance it has on China’s energy consumption.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
The Federal Open Market Committee (FOMC) sought to further mitigate the fallout from last December’s rise in the federal funds rate by ignoring its own economic models, and, instead, embracing a more dovish outlook for the policy rate, as well as slowing the planned pace of its balance sheet roll off.
No further interest rate increases are envisaged by the FOMC in 2019, while any required in 2020 will not take policy settings into restrictive territory due to the imminent arrival of sustainable growth.
The persistently low inflation backdrop has permitted the Fed to embrace a dovish approach, but engineering a significant decline in real interest rates could prove problematic if the economy falters at some future point.
Fears about yield curve inversion and recession risks persist, despite the Fed’s dovish tilt, thereby potentially raising concerns about the overall credibility of monetary policy conduct.
US short-term interest rates are being anchored to a “new normal” environment of low inflation and slower economic growth compared to history, and, consequently, the bond market appears to have won its battle of wills with the FOMC by forcing members to reduce their estimate of the neutral federal funds rate.
Japan’s policymakers continue to fret about the lack of inflation but it is worth remembering the norm globally and historically is for the price of manufactured goods to decline over time. As companies grow, specialise and scale up the cost of production falls and with it final consumer goods prices. Falling retail prices which increase consumer real purchasing power is good news for Japanese households and for discretionary spending. Moreover with labour productivity growth outpacing wages costs by a wide margin, companies can absorb lower prices without sacrificing profitability. Stay overweight Japanese equities.
The anticipated cut in the bank reserve ratio didn’t materialize in the latest Monetary Board (MB) meeting–the first one chaired by newly appointed BSP Gov. Benjamin Diokno. In the ANC televised interview, Diokno expressed his preference to reduce the high bank reserve requirement ratio (RRR: 18%) by 1% every quarter, fueling bond market excitement that severely compressed yields. The policy rate was also unchanged amid the dovish tone in the BSP’s press release after the meeting.
According to a senior monetary official, the RRR cut is a ‘live’ issue. That the timing of any adjustment is key given the operational and policy implications of an RRR cut.
Accentuating the MB’s depiction of benign inflation is an inflation trajectory settled comfortably in its target band in 2019-20 with inflation expectations close to being anchored within the band as well. Key downside risk to growth cited by the MB is the ‘current budget impasse in Congress is not resolved soon’. Prolonged El Niño is among those factors that can upset the broadly balanced risks to inflation.
A BSP under a pro-growth BSP chief need not necessarily change the ‘sequencing and timing’ of monetary policy decisions/actions facing liquidity and growth challenges. Likelihood that 1Q GDP (May 9 release) may be given slight emphasis in the BSP’s shift to accommodation starting with the bank reserve cut.
We expect a bond market correction following excitement over the BSP’s dovish pivot this early that led to severe yield compression. Buy the 5yrs to short-duration on dips.
In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.
The presidential race is unchanged as data from a premier polling firm, SMRC, shows a 26 percentage point lead for Widodo. Thus far only one poll has shown a narrow lead — 12 percent, according to Kompas — but until other data corroborates this, it appears to be an outlier that does not change the outlook. Widodo is heavily touting the MRT opening, but provincial leaders are struggling to set a tariff rate — it will therefore still be free when it opens for public use on 25 March. The Religion Ministry appointments-graft scandal threatens to implicate the minister. Trade acrimony with the EU is escalating. West Java Governor Ridwan Kamil, a 2024 presidential contender, garnered negative publicity for appointing relatives. Legislators and stakeholders are clamoring for government progress on a draft Bill on Personal Data Protection.
Politics: Eager to maximize advantages from the imminent commercial start of Jakarta’s Mass Rapid Transit (MRT) line, President Joko Widodo claimed credit for having made a “political decision” to take on the project’s cost. In fact, the magnitude of those costs to the province remains unclear: three days from the start of operations, policymakers have yet to set the tariff for riders (Page 2). The corruption scandal enveloping the Islamic United Development Party (PPP) – at the worst possible time in the election cycle – could further depress the clout of Islamic interests in the next parliament (p. 3). West Java Governor Ridwan Kamil invited criticism by appointing two relatives to a high-profile Development Acceleration Team (TAP) under his aegis (p. 4).
Surveys: The large lead for President Joko Widodo appears intact, based on findings from three recent polls, although one reputable agency produced divergent results. Widodo has a lead of at least 19 percentage points according to three surveys in late February and March: in addition to the Survey Network (LSI) and Alvara Research (discussed in recent Ref Wkly editions), new data has emerged from Saiful Mujani Research and Consulting (SMRC) placing Widodo’s margin over Prabowo at 26 percentage points. A poll conducted simultaneously by Kompas measured the lead at only 12 percentage points – but until other polling corroborates this, it constitutes an outlier that lacks significance. In any event, even if Widodo’s lead has shrunk as much as Kompas claims, he would still enjoy a comfortable cushion (p. 4).
Justice: Religion Minister Lukman Saefuddin is under scrutiny after investigators discovered Rp600 million in cash in his office desk drawer. Meanwhile, former PPP Chair Romahurmuziy failed to appear for questioning as a suspect (p. 7).
Produced since 2003, the Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news. The writer is Kevin O’Rourke, author of the book Reformasi. For subscription info please contact: <[email protected]>.
Policy News: Public officials clamored for a long-awaited Bill on Protecting Personal Data (RUU PDP) (p. 8). Energy Minister Ignatius Jonan welcomed a parliamentary suggestion to subsidize the higher-octane petroleum product Pertamax, rather than Premium – but he remained noncommittal about implementation (p. 9).
Infrastructure: Jakarta’s governor rejected suggestions from provincial legislators that the MRT should be free, or at least free for Jakarta residents (p. 10).
International: Policymakers denounced the European Union (EU) for allegedly discriminating against biodiesel from crude palm oil (CPO). The planned Comprehensive Partnership Agreement with Europe (IEU‑Cepa) could be at risk (p. 11).
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