Macro

In this briefing:

1. Global Credit Cycle: Full-Blown Repeat of 2008 Crisis Unlikely…Contrary to Doomsayers
2. RBI Credibility at Stake
3. Philippines: El Niño’s Comeback – How Bad?
4. FLASH: UK Labour Market Melt-Up into 2019
5. Widodo Lead Intact / VP Debate Lacks Impact / Trade Slows / Permitting Impediment / PPP Chair Arrest

1. Global Credit Cycle: Full-Blown Repeat of 2008 Crisis Unlikely…Contrary to Doomsayers

The slowing world economy has raised concerns in some quarters about an inflexion point in the global credit cycle that could provoke a repeat of the 2008 crisis due to higher levels of debt.

Governments have mainly contributed to the rise in global debt since 2008, particularly in advanced economies, while China has presided over debt expansion across all non-financial sectors of its economy.

Concerns about the US corporate bond market have centred around the significant growth of the BBB-rated segment since 2008, along with its ability to sustain liquidity given the looming satiation of investor mandates.

China’s corporate debt has risen aggressively and become increasingly risky since 2008, but a sovereign backstop and predominantly domestic funding sources limit any prospective cross-border fallout.

A full-blown repetition of the 2008 debt crisis is unlikely due to: 1) lower cross-border banking linkages, 2) a smaller role for banks in overall credit intermediation, and 3) far lower leverage in the US financial system.

2. RBI Credibility at Stake

By Shumita Deveshwar, Director, India research

The Reserve Bank of India’s approval of an interim dividend to the government from its surplus reserves is yet another example of the central bank conforming to the government’s wishes under the leadership of Governor Shaktikanta Das. While investors cheered the RBI’s softer monetary policy stance earlier this month, former RBI heads continue to warn against the government’s short-term bias and emphasize the need for RBI independence.

• Most policies that led to the spat between the RBI and the government spat have now been reversed
• The growth focus has translated into easier banking and regulatory norms
• A softer monetary policy puts the RBI’s hard-fought credibility at stake
• Outflows due to political uncertainty and global headwinds will prove tough for a less credible RBI to counter
• Loose fiscal and monetary policies put long-term macroeconomic stability at risk

3. Philippines: El Niño’s Comeback – How Bad?

• With SST (sea surface temperature) in the Pacific past 26^oC, El Niño’s comeback is highly likely. Past occurrences of severe El Niño was isolated in the farm sector with upside risks to food prices. While another round of contraction in farm output and employment would be expected, the liberal rice import policy would entice imports to plug the gap between demand-supply in 1H19 and ease potential rice/food price upticks. 

• The El Niño supply shock would coincide with the global macro slowdown and fiscal spending delays that spawn downside risks to growth. With a legally handicapped fiscal budget, monetary policy may have to step up to ease likelihood of severe, near-term constraints to growth. We believe monetary adjustments would be the appropriate responses to the macro challenges as inflation winds down. Sequencing and appropriate timing of monetary reaction remains key to credible policy responses starting with the bank reserve ratio cut in 2Q19 (staggered cuts for a maximum of 3% this year) followed by policy rate cuts commencing in 3Q19 (cumulative -50bp in 2H19) when inflation hits rock bottom of less than 2%.

• Buy bonds with preference for the curve’s belly to short-duration.

4. FLASH: UK Labour Market Melt-Up into 2019

• The LFS unemployment rate fell to 3.9% on rapid wage growth of 222k. Unusually elevated participation is temporarily exaggerating strength, and its correction could cause a sharper slowdown in the data, irrespective of Brexit.
• Wage growth also exceeded expectations owing to revisions. The increasingly tight labour market appears to have melted-up at the start of 2019.

5. Widodo Lead Intact / VP Debate Lacks Impact / Trade Slows / Permitting Impediment / PPP Chair Arrest

A new poll from Alvara concurs with last week’s LSI data and shows Widodo’s lead intact.  A TV debate between the VP nominees was largely perfunctory, and Prabowo’s running mate Sandiaga Uno failed to use the opportunity to make up ground in the presidential race.  The KPK arrested Romahurmuziy, an arder Widodo supporter and chair of the Islamic United Development Party (PPP); this reflects poorly on the president at an awkward time, but is unlikely to cause significant damage.  Both exports and imports slowed precipitously in the Jan-Feb period, although capital-goods imports held up. 

Politics: The 17 March vice-presidential debate featured few stellar moments, but President Joko Widodo’s running mate Ma’ruf Amin generally outperformed expectations.  He commanded detail without perpetrating major gaffes.  Although Prabowo Subianto’s running mate Sandiaga Uno performed with eloquence, he lacked resonance and failed to make the compelling breakthroughs that his ticket needs (Page 2).  Officials in Prabowo’s campaign reiterated suspicions about inaccuracies in the voter list.  To be sure, maladministration has been chronically problematic, producing inaccuracies in the list – but alleging conspiratorial intent would be far-fetched (p. 3).  Widodo urged supporters to encourage voter turnout, counter hoaxes and avoid complacency (p. 4). 

Surveys: The Alvara Research Institute measured Widodo’s lead over Prabowo at 19 percentage points in a poll conducted in late February and early March.  This generally corroborates recent findings from the Survey Network (LSI) (p. 5).

Disasters: In Sentani, outside the provincial capital of Jayapura in Papua Province, flash flooding and mudslides killed at least 73, with 60 others still missing (p. 6).

Justice: United Development Party (PPP) Chair Romahurmuziy entered custody as a suspect on charges of graft.  Investigators from the Anti-Corruption Commission (KPK) believe he took bribes in exchange for arranging senior appointments in the Religion Ministry, which PPP’s Lukman Saefuddin heads.  If so, the case would mark the latest in a long line of Religion Ministry corruption scandals, and the second to embroil a PPP chair.  The affair is an embarrassment at a crucial time for Widodo, but the details do not implicate the president and the KPK has refrained from pursuing Saefuddin, for now.  Romahurmuziy has enthusiastically supported Widodo and he championed the VP candidacy of Amin; nonetheless, the PPP figure still lacks national prominence and his disgrace seems unlikely to materially affect the election (p. 7).  Testimony from a Bekasi official sheds more light on Lippo Group practices in the Meikarta bribery case (p. 8).

Policy News: The coordinating economics minister suggested penalizing district‑level governments that lack detailed spatial plans, which are crucial for a planned online investment permitting system (p. 9).

Economics: The finance minister registered caution about the trade surplus recorded during February, as exports underperformed while imports fell even further.  But capital goods imports have held up (p. 10).

In this briefing:

1. UK Cycle: Bullish Trends Stretch Before Slowing
2. Uzbekistan Is a Promising Latecomer, but Investors Need to Watch Out and Stay on Top of Data
3. Mildly Expansionary, but Socially Magnanimous While Staying Focused on Long-Term Competitiveness
4. January Headline Data for China

1. UK Cycle: Bullish Trends Stretch Before Slowing

• UK employment growth increased further in Dec-18 despite GDP’s yearend weakness. Higher participation has bolstered the bullish trend but tends to be temporary.
• Slower employment growth need not prevent further falls in the unemployment rate, which looks to be creating an increasingly tight labour market.
• Wage growth is also likely to ease back in the new year, although the extent should be curtailed by an unwind of the depressed bonus share, in my view.

2. Uzbekistan Is a Promising Latecomer, but Investors Need to Watch Out and Stay on Top of Data

3. Mildly Expansionary, but Socially Magnanimous While Staying Focused on Long-Term Competitiveness

Singapore’s growth in 2017 and 2018 has been primarily productivity-driven, suggesting that the 5-year project of reducing dependence on foreign workers (of all skill levels) is finally bearing fruit. The 2019 Budget further lowered the ceiling on employing foreigners in the services sector, and withdrew the NOR scheme from 2002 that was aimed at attracting senior executives with  regional/global roles.

The healthy twin surpluses are evident even amid the fog of ultra-conservative fiscal accounting (which excludes land sales and investment income from GIC, MAS and Temasek from revenue, and only includes a small part of their past earnings as a “net investment return contribution”). The small stimulus was aimed mainly at providing a slew of health and other benefits to those born between 1950 and 1959 (the “Merdeka Generation”); the previous “Pioneer Generation” having already been rewarded previously. These are sensible interventions to reduce inequality. 

This year, we estimate that Singapore’s real GDP will decelerate to 2.8% growth (from 3.7% in 2017 and 3.2% in 2018) as the global electronics cycle turns downward — evident in the sharp slump in non-oil domestic exports in Dec18 and Jan19. But Singapore’s twin surpluses have ample room to provide a substantial fiscal stimulus should the global economy worsen substantially further. 

4. January Headline Data for China

Sometimes at Balding’s World we explore worm holes of Chinese data. Yes, granular data is awesome, but the global economic calendar should not be overlooked nor headline data taken for granted. To that end today we take a look at some key figures to recently emerge.

In this briefing:

1. RBI Credibility at Stake
2. Philippines: El Niño’s Comback – How Bad?
3. FLASH: UK Labour Market Melt-Up into 2019
4. Widodo Lead Intact / VP Debate Lacks Impact / Trade Slows / Permitting Impediment / PPP Chair Arrest
5. Brexit – The UK Economy Battles On

1. RBI Credibility at Stake

By Shumita Deveshwar, Director, India research

The Reserve Bank of India’s approval of an interim dividend to the government from its surplus reserves is yet another example of the central bank conforming to the government’s wishes under the leadership of Governor Shaktikanta Das. While investors cheered the RBI’s softer monetary policy stance earlier this month, former RBI heads continue to warn against the government’s short-term bias and emphasize the need for RBI independence.

• Most policies that led to the spat between the RBI and the government spat have now been reversed
• The growth focus has translated into easier banking and regulatory norms
• A softer monetary policy puts the RBI’s hard-fought credibility at stake
• Outflows due to political uncertainty and global headwinds will prove tough for a less credible RBI to counter
• Loose fiscal and monetary policies put long-term macroeconomic stability at risk

2. Philippines: El Niño’s Comback – How Bad?

• With SST (sea surface temperature) in the Pacific past 26^oC, El Niño’s comeback is highly likely. Past occurrences of severe El Niño was isolated in the farm sector with upside risks to food prices. While another round of contraction in farm output and employment would be expected, the liberal rice import policy would entice imports to plug the gap between demand-supply in 1H19 and ease potential rice/food price upticks. 

• The El Niño supply shock would coincide with the global macro slowdown and fiscal spending delays that spawn downside risks to growth. With a legally handicapped fiscal budget, monetary policy may have to step up to ease likelihood of severe, near-term constraints to growth. We believe monetary adjustments would be the appropriate responses to the macro challenges as inflation winds down. Sequencing and appropriate timing of monetary reaction remains key to credible policy responses starting with the bank reserve ratio cut in 2Q19 (staggered cuts for a maximum of 3% this year) followed by policy rate cuts commencing in 3Q19 (cumulative -50bp in 2H19) when inflation hits rock bottom of less than 2%.

• Buy bonds with preference for the curve’s belly to short-duration.

3. FLASH: UK Labour Market Melt-Up into 2019

• The LFS unemployment rate fell to 3.9% on rapid wage growth of 222k. Unusually elevated participation is temporarily exaggerating strength, and its correction could cause a sharper slowdown in the data, irrespective of Brexit.
• Wage growth also exceeded expectations owing to revisions. The increasingly tight labour market appears to have melted-up at the start of 2019.

4. Widodo Lead Intact / VP Debate Lacks Impact / Trade Slows / Permitting Impediment / PPP Chair Arrest

A new poll from Alvara concurs with last week’s LSI data and shows Widodo’s lead intact.  A TV debate between the VP nominees was largely perfunctory, and Prabowo’s running mate Sandiaga Uno failed to use the opportunity to make up ground in the presidential race.  The KPK arrested Romahurmuziy, an arder Widodo supporter and chair of the Islamic United Development Party (PPP); this reflects poorly on the president at an awkward time, but is unlikely to cause significant damage.  Both exports and imports slowed precipitously in the Jan-Feb period, although capital-goods imports held up. 

Politics: The 17 March vice-presidential debate featured few stellar moments, but President Joko Widodo’s running mate Ma’ruf Amin generally outperformed expectations.  He commanded detail without perpetrating major gaffes.  Although Prabowo Subianto’s running mate Sandiaga Uno performed with eloquence, he lacked resonance and failed to make the compelling breakthroughs that his ticket needs (Page 2).  Officials in Prabowo’s campaign reiterated suspicions about inaccuracies in the voter list.  To be sure, maladministration has been chronically problematic, producing inaccuracies in the list – but alleging conspiratorial intent would be far-fetched (p. 3).  Widodo urged supporters to encourage voter turnout, counter hoaxes and avoid complacency (p. 4). 

Surveys: The Alvara Research Institute measured Widodo’s lead over Prabowo at 19 percentage points in a poll conducted in late February and early March.  This generally corroborates recent findings from the Survey Network (LSI) (p. 5).

Disasters: In Sentani, outside the provincial capital of Jayapura in Papua Province, flash flooding and mudslides killed at least 73, with 60 others still missing (p. 6).

Justice: United Development Party (PPP) Chair Romahurmuziy entered custody as a suspect on charges of graft.  Investigators from the Anti-Corruption Commission (KPK) believe he took bribes in exchange for arranging senior appointments in the Religion Ministry, which PPP’s Lukman Saefuddin heads.  If so, the case would mark the latest in a long line of Religion Ministry corruption scandals, and the second to embroil a PPP chair.  The affair is an embarrassment at a crucial time for Widodo, but the details do not implicate the president and the KPK has refrained from pursuing Saefuddin, for now.  Romahurmuziy has enthusiastically supported Widodo and he championed the VP candidacy of Amin; nonetheless, the PPP figure still lacks national prominence and his disgrace seems unlikely to materially affect the election (p. 7).  Testimony from a Bekasi official sheds more light on Lippo Group practices in the Meikarta bribery case (p. 8).

Policy News: The coordinating economics minister suggested penalizing district‑level governments that lack detailed spatial plans, which are crucial for a planned online investment permitting system (p. 9).

Economics: The finance minister registered caution about the trade surplus recorded during February, as exports underperformed while imports fell even further.  But capital goods imports have held up (p. 10).

5. Brexit – The UK Economy Battles On

The political crisis in the UK has left Brexit in shambles. Foreign manufacturers are exiting. Investment spending is contracting while London house prices are correcting fast. Despite this the UK economy has held up well, thanks to exporters and domestic consumers. UK economic activity is moderating but not as quickly as in the euro-area where heightened political tensions in Italy and France, a weakening German economy and slower additions to global US dollar GDP have taken their toll. Although Euro-area growth prospects are looking shaky economic activity should revive in 2H19. The same cannot be said about the UK economy. 

In this briefing:

1. Philippines: El Niño’s Comback – How Bad?
2. FLASH: UK Labour Market Melt-Up into 2019
3. Widodo Lead Intact / VP Debate Lacks Impact / Trade Slows / Permitting Impediment / PPP Chair Arrest
4. Brexit – The UK Economy Battles On
5. Foreign Investment Law/Trade War/Huawei/Eu Vs PRC

1. Philippines: El Niño’s Comback – How Bad?

• With SST (sea surface temperature) in the Pacific past 26^oC, El Niño’s comeback is highly likely. Past occurrences of severe El Niño was isolated in the farm sector with upside risks to food prices. While another round of contraction in farm output and employment would be expected, the liberal rice import policy would entice imports to plug the gap between demand-supply in 1H19 and ease potential rice/food price upticks. 

• The El Niño supply shock would coincide with the global macro slowdown and fiscal spending delays that spawn downside risks to growth. With a legally handicapped fiscal budget, monetary policy may have to step up to ease likelihood of severe, near-term constraints to growth. We believe monetary adjustments would be the appropriate responses to the macro challenges as inflation winds down. Sequencing and appropriate timing of monetary reaction remains key to credible policy responses starting with the bank reserve ratio cut in 2Q19 (staggered cuts for a maximum of 3% this year) followed by policy rate cuts commencing in 3Q19 (cumulative -50bp in 2H19) when inflation hits rock bottom of less than 2%.

• Buy bonds with preference for the curve’s belly to short-duration.

2. FLASH: UK Labour Market Melt-Up into 2019

• The LFS unemployment rate fell to 3.9% on rapid wage growth of 222k. Unusually elevated participation is temporarily exaggerating strength, and its correction could cause a sharper slowdown in the data, irrespective of Brexit.
• Wage growth also exceeded expectations owing to revisions. The increasingly tight labour market appears to have melted-up at the start of 2019.

3. Widodo Lead Intact / VP Debate Lacks Impact / Trade Slows / Permitting Impediment / PPP Chair Arrest

A new poll from Alvara concurs with last week’s LSI data and shows Widodo’s lead intact.  A TV debate between the VP nominees was largely perfunctory, and Prabowo’s running mate Sandiaga Uno failed to use the opportunity to make up ground in the presidential race.  The KPK arrested Romahurmuziy, an arder Widodo supporter and chair of the Islamic United Development Party (PPP); this reflects poorly on the president at an awkward time, but is unlikely to cause significant damage.  Both exports and imports slowed precipitously in the Jan-Feb period, although capital-goods imports held up. 

Politics: The 17 March vice-presidential debate featured few stellar moments, but President Joko Widodo’s running mate Ma’ruf Amin generally outperformed expectations.  He commanded detail without perpetrating major gaffes.  Although Prabowo Subianto’s running mate Sandiaga Uno performed with eloquence, he lacked resonance and failed to make the compelling breakthroughs that his ticket needs (Page 2).  Officials in Prabowo’s campaign reiterated suspicions about inaccuracies in the voter list.  To be sure, maladministration has been chronically problematic, producing inaccuracies in the list – but alleging conspiratorial intent would be far-fetched (p. 3).  Widodo urged supporters to encourage voter turnout, counter hoaxes and avoid complacency (p. 4). 

Surveys: The Alvara Research Institute measured Widodo’s lead over Prabowo at 19 percentage points in a poll conducted in late February and early March.  This generally corroborates recent findings from the Survey Network (LSI) (p. 5).

Disasters: In Sentani, outside the provincial capital of Jayapura in Papua Province, flash flooding and mudslides killed at least 73, with 60 others still missing (p. 6).

Justice: United Development Party (PPP) Chair Romahurmuziy entered custody as a suspect on charges of graft.  Investigators from the Anti-Corruption Commission (KPK) believe he took bribes in exchange for arranging senior appointments in the Religion Ministry, which PPP’s Lukman Saefuddin heads.  If so, the case would mark the latest in a long line of Religion Ministry corruption scandals, and the second to embroil a PPP chair.  The affair is an embarrassment at a crucial time for Widodo, but the details do not implicate the president and the KPK has refrained from pursuing Saefuddin, for now.  Romahurmuziy has enthusiastically supported Widodo and he championed the VP candidacy of Amin; nonetheless, the PPP figure still lacks national prominence and his disgrace seems unlikely to materially affect the election (p. 7).  Testimony from a Bekasi official sheds more light on Lippo Group practices in the Meikarta bribery case (p. 8).

Policy News: The coordinating economics minister suggested penalizing district‑level governments that lack detailed spatial plans, which are crucial for a planned online investment permitting system (p. 9).

Economics: The finance minister registered caution about the trade surplus recorded during February, as exports underperformed while imports fell even further.  But capital goods imports have held up (p. 10).

4. Brexit – The UK Economy Battles On

The political crisis in the UK has left Brexit in shambles. Foreign manufacturers are exiting. Investment spending is contracting while London house prices are correcting fast. Despite this the UK economy has held up well, thanks to exporters and domestic consumers. UK economic activity is moderating but not as quickly as in the euro-area where heightened political tensions in Italy and France, a weakening German economy and slower additions to global US dollar GDP have taken their toll. Although Euro-area growth prospects are looking shaky economic activity should revive in 2H19. The same cannot be said about the UK economy. 

5. Foreign Investment Law/Trade War/Huawei/Eu Vs PRC

China News That Matters

• NPC approves “rushed” foreign investment law
• Trump in no hurry as “China threat” grows 
• Huawei struggles to build trust
• EU takes a stand: China as “systemic rival”

In this briefing:

1. Fed Reflates the ‘buyside Bubble’?
2. When Job ‘Quality’ Prevailed over ‘Headcount’
3. China Economics:  China’s Strategy on Trade War Has Worked
4. FLASH: UK Denying No Deal Does Not Reduce Risk
5. UK Fiscal: Waiting While Brexit Burns

1. Fed Reflates the ‘buyside Bubble’?

By Steve Blitz, Chief US Economist:

• Central banks, led by the Fed, have restored market bullishness
• But the December selloff could still be a taste of future trouble
• A decade of low interest rates has created a powerful search for yield

2. When Job ‘Quality’ Prevailed over ‘Headcount’

• A 387k decline in employment didn’t weigh on the jobless rate of 5.2% according to the latest labor survey data. As the labor participation rate declined in 4Q18, roughly 2.1mn of those in the labor pool voluntarily passed up the job search, to ease any employment demand-supply mismatch.

• For those employed particularly in the non-farm, production sectors led by manufacturing and construction, the quality of jobs generated dominated the lack of headcount gains in determining incomes, if not, uplifting purchasing power. If we exclude direct government job creation from the labor stats, we obtain a non-farm, private job creation of 1.1mn (vs 3Q18: -8.6k) up 3.8%YoY. Average weekly work hours were 43.2 versus 40.6 a year-ago suggesting more overtime work. Salaried workers grew by 1.4mn (+5.6%YoY) employed mainly from private establishments. Underemployment fell to 15.6% in the latest job survey vs 18% a year-ago.

• As inflation recedes, the robust non-farm employment and better job quality won’t be compelling for policymakers to rush any form of monetary accommodation. Since the jobs data or GDP prospects are not as vulnerable to sharp downswings due to onshore catalysts, e.g., upbeat public investments, consumption recovery, despite a less-than-encouraging global backdrop, the Central Bank may focus on possible risk of a liquidity crunch and emergence of positive, real interest rates in determining the policy options for monetary accommodation this year.

3. China Economics:  China’s Strategy on Trade War Has Worked

First, during the past couple of weeks, the most important event regarding the Chinese economy is the China US trade talk.  It is reported that both sides have made a preliminary agreement on trade war truce. It is an extraordinary development.   At the beginning of this China US trade war, most analysts had underestimated the seriousness of this trade conflict. Then after a series of escalations, analysts tend to overestimate this conflict by exploring the possibility of a full-scale conflict between China and US including national security, military and economic competition etc. we agree that China and US are in direct competition in almost every field. The issue is President Trump. He has to deal with the internal issues including the Muller investigation and the Democrats. So far, he has failed to make essential progress in dealing with internal opponents. He also just failed another Kim Trump summit. In our opinion, he is keen to make a deal with China. He is in a much weaker position than President Xi. Although at the beginning President Xi was under some criticism, currently, his authority is with no significant challenge. President Xi has also pretended to be humble when dealing with Trump. In our opinion, China’s strategy, such as buying time by deliberate delays or deceptions, has worked. 

4. FLASH: UK Denying No Deal Does Not Reduce Risk

• The UK parliament voted to reject leaving with no agreement, as widely expected. Shambolic management around that looks set to force ministerial resignation.
• Parliament continues to indulgence itself in motions against leaving the EU without a deal, but that doesn’t stop it being the default defined by current laws.
• I still see the relative probabilities of a deal, no deal, and no Brexit at 45:35:20.

5. UK Fiscal: Waiting While Brexit Burns

• The Spring Statement revealed marginally more fiscal room and no significant policy changes, consistent with the Chancellor’s intent to downgrade the event.
• Fiscal policy can respond to the Brexit outcome, despite total financing rising on a heavy redemption profile. Net liabilities look weirdly skewed away from gilts.
• Recent complaints about the RPI are being considered with a response planned for April. Changes to its use are more likely than to the measure’s methodology.

In this briefing:

1. FLASH: UK Labour Market Melt-Up into 2019
2. Widodo Lead Intact / VP Debate Lacks Impact / Trade Slows / Permitting Impediment / PPP Chair Arrest
3. Brexit – The UK Economy Battles On
4. Foreign Investment Law/Trade War/Huawei/Eu Vs PRC
5. Fed Optimism Dims with Sentiment

1. FLASH: UK Labour Market Melt-Up into 2019

• The LFS unemployment rate fell to 3.9% on rapid wage growth of 222k. Unusually elevated participation is temporarily exaggerating strength, and its correction could cause a sharper slowdown in the data, irrespective of Brexit.
• Wage growth also exceeded expectations owing to revisions. The increasingly tight labour market appears to have melted-up at the start of 2019.

2. Widodo Lead Intact / VP Debate Lacks Impact / Trade Slows / Permitting Impediment / PPP Chair Arrest

A new poll from Alvara concurs with last week’s LSI data and shows Widodo’s lead intact.  A TV debate between the VP nominees was largely perfunctory, and Prabowo’s running mate Sandiaga Uno failed to use the opportunity to make up ground in the presidential race.  The KPK arrested Romahurmuziy, an arder Widodo supporter and chair of the Islamic United Development Party (PPP); this reflects poorly on the president at an awkward time, but is unlikely to cause significant damage.  Both exports and imports slowed precipitously in the Jan-Feb period, although capital-goods imports held up. 

Politics: The 17 March vice-presidential debate featured few stellar moments, but President Joko Widodo’s running mate Ma’ruf Amin generally outperformed expectations.  He commanded detail without perpetrating major gaffes.  Although Prabowo Subianto’s running mate Sandiaga Uno performed with eloquence, he lacked resonance and failed to make the compelling breakthroughs that his ticket needs (Page 2).  Officials in Prabowo’s campaign reiterated suspicions about inaccuracies in the voter list.  To be sure, maladministration has been chronically problematic, producing inaccuracies in the list – but alleging conspiratorial intent would be far-fetched (p. 3).  Widodo urged supporters to encourage voter turnout, counter hoaxes and avoid complacency (p. 4). 

Surveys: The Alvara Research Institute measured Widodo’s lead over Prabowo at 19 percentage points in a poll conducted in late February and early March.  This generally corroborates recent findings from the Survey Network (LSI) (p. 5).

Disasters: In Sentani, outside the provincial capital of Jayapura in Papua Province, flash flooding and mudslides killed at least 73, with 60 others still missing (p. 6).

Justice: United Development Party (PPP) Chair Romahurmuziy entered custody as a suspect on charges of graft.  Investigators from the Anti-Corruption Commission (KPK) believe he took bribes in exchange for arranging senior appointments in the Religion Ministry, which PPP’s Lukman Saefuddin heads.  If so, the case would mark the latest in a long line of Religion Ministry corruption scandals, and the second to embroil a PPP chair.  The affair is an embarrassment at a crucial time for Widodo, but the details do not implicate the president and the KPK has refrained from pursuing Saefuddin, for now.  Romahurmuziy has enthusiastically supported Widodo and he championed the VP candidacy of Amin; nonetheless, the PPP figure still lacks national prominence and his disgrace seems unlikely to materially affect the election (p. 7).  Testimony from a Bekasi official sheds more light on Lippo Group practices in the Meikarta bribery case (p. 8).

Policy News: The coordinating economics minister suggested penalizing district‑level governments that lack detailed spatial plans, which are crucial for a planned online investment permitting system (p. 9).

Economics: The finance minister registered caution about the trade surplus recorded during February, as exports underperformed while imports fell even further.  But capital goods imports have held up (p. 10).

3. Brexit – The UK Economy Battles On

The political crisis in the UK has left Brexit in shambles. Foreign manufacturers are exiting. Investment spending is contracting while London house prices are correcting fast. Despite this the UK economy has held up well, thanks to exporters and domestic consumers. UK economic activity is moderating but not as quickly as in the euro-area where heightened political tensions in Italy and France, a weakening German economy and slower additions to global US dollar GDP have taken their toll. Although Euro-area growth prospects are looking shaky economic activity should revive in 2H19. The same cannot be said about the UK economy. 

4. Foreign Investment Law/Trade War/Huawei/Eu Vs PRC

China News That Matters

• NPC approves “rushed” foreign investment law
• Trump in no hurry as “China threat” grows 
• Huawei struggles to build trust
• EU takes a stand: China as “systemic rival”

5. Fed Optimism Dims with Sentiment

By Steve Blitz, Chief US Economist

• FOMC sees economy growing as expected, but risks no longer “balanced”
• Ending QT now underscores their concerns about slowing growth
• Swapping MBS for Treasuries when QT stops is backdoor QE

In this briefing:

1. Widodo Lead Intact / VP Debate Lacks Impact / Trade Slows / Permitting Impediment / PPP Chair Arrest
2. Brexit – The UK Economy Battles On
3. Foreign Investment Law/Trade War/Huawei/Eu Vs PRC
4. Fed Optimism Dims with Sentiment
5. Fed Reflates the ‘buyside Bubble’?

1. Widodo Lead Intact / VP Debate Lacks Impact / Trade Slows / Permitting Impediment / PPP Chair Arrest

A new poll from Alvara concurs with last week’s LSI data and shows Widodo’s lead intact.  A TV debate between the VP nominees was largely perfunctory, and Prabowo’s running mate Sandiaga Uno failed to use the opportunity to make up ground in the presidential race.  The KPK arrested Romahurmuziy, an arder Widodo supporter and chair of the Islamic United Development Party (PPP); this reflects poorly on the president at an awkward time, but is unlikely to cause significant damage.  Both exports and imports slowed precipitously in the Jan-Feb period, although capital-goods imports held up. 

Politics: The 17 March vice-presidential debate featured few stellar moments, but President Joko Widodo’s running mate Ma’ruf Amin generally outperformed expectations.  He commanded detail without perpetrating major gaffes.  Although Prabowo Subianto’s running mate Sandiaga Uno performed with eloquence, he lacked resonance and failed to make the compelling breakthroughs that his ticket needs (Page 2).  Officials in Prabowo’s campaign reiterated suspicions about inaccuracies in the voter list.  To be sure, maladministration has been chronically problematic, producing inaccuracies in the list – but alleging conspiratorial intent would be far-fetched (p. 3).  Widodo urged supporters to encourage voter turnout, counter hoaxes and avoid complacency (p. 4). 

Surveys: The Alvara Research Institute measured Widodo’s lead over Prabowo at 19 percentage points in a poll conducted in late February and early March.  This generally corroborates recent findings from the Survey Network (LSI) (p. 5).

Disasters: In Sentani, outside the provincial capital of Jayapura in Papua Province, flash flooding and mudslides killed at least 73, with 60 others still missing (p. 6).

Justice: United Development Party (PPP) Chair Romahurmuziy entered custody as a suspect on charges of graft.  Investigators from the Anti-Corruption Commission (KPK) believe he took bribes in exchange for arranging senior appointments in the Religion Ministry, which PPP’s Lukman Saefuddin heads.  If so, the case would mark the latest in a long line of Religion Ministry corruption scandals, and the second to embroil a PPP chair.  The affair is an embarrassment at a crucial time for Widodo, but the details do not implicate the president and the KPK has refrained from pursuing Saefuddin, for now.  Romahurmuziy has enthusiastically supported Widodo and he championed the VP candidacy of Amin; nonetheless, the PPP figure still lacks national prominence and his disgrace seems unlikely to materially affect the election (p. 7).  Testimony from a Bekasi official sheds more light on Lippo Group practices in the Meikarta bribery case (p. 8).

Policy News: The coordinating economics minister suggested penalizing district‑level governments that lack detailed spatial plans, which are crucial for a planned online investment permitting system (p. 9).

Economics: The finance minister registered caution about the trade surplus recorded during February, as exports underperformed while imports fell even further.  But capital goods imports have held up (p. 10).

2. Brexit – The UK Economy Battles On

The political crisis in the UK has left Brexit in shambles. Foreign manufacturers are exiting. Investment spending is contracting while London house prices are correcting fast. Despite this the UK economy has held up well, thanks to exporters and domestic consumers. UK economic activity is moderating but not as quickly as in the euro-area where heightened political tensions in Italy and France, a weakening German economy and slower additions to global US dollar GDP have taken their toll. Although Euro-area growth prospects are looking shaky economic activity should revive in 2H19. The same cannot be said about the UK economy. 

3. Foreign Investment Law/Trade War/Huawei/Eu Vs PRC

China News That Matters

• NPC approves “rushed” foreign investment law
• Trump in no hurry as “China threat” grows 
• Huawei struggles to build trust
• EU takes a stand: China as “systemic rival”

4. Fed Optimism Dims with Sentiment

By Steve Blitz, Chief US Economist

• FOMC sees economy growing as expected, but risks no longer “balanced”
• Ending QT now underscores their concerns about slowing growth
• Swapping MBS for Treasuries when QT stops is backdoor QE

5. Fed Reflates the ‘buyside Bubble’?

By Steve Blitz, Chief US Economist:

• Central banks, led by the Fed, have restored market bullishness
• But the December selloff could still be a taste of future trouble
• A decade of low interest rates has created a powerful search for yield

In this briefing:

1. Brexit – The UK Economy Battles On
2. Foreign Investment Law/Trade War/Huawei/Eu Vs PRC
3. Fed Optimism Dims with Sentiment
4. Fed Reflates the ‘buyside Bubble’?
5. When Job ‘Quality’ Prevailed over ‘Headcount’

1. Brexit – The UK Economy Battles On

The political crisis in the UK has left Brexit in shambles. Foreign manufacturers are exiting. Investment spending is contracting while London house prices are correcting fast. Despite this the UK economy has held up well, thanks to exporters and domestic consumers. UK economic activity is moderating but not as quickly as in the euro-area where heightened political tensions in Italy and France, a weakening German economy and slower additions to global US dollar GDP have taken their toll. Although Euro-area growth prospects are looking shaky economic activity should revive in 2H19. The same cannot be said about the UK economy. 

2. Foreign Investment Law/Trade War/Huawei/Eu Vs PRC

China News That Matters

• NPC approves “rushed” foreign investment law
• Trump in no hurry as “China threat” grows 
• Huawei struggles to build trust
• EU takes a stand: China as “systemic rival”

3. Fed Optimism Dims with Sentiment

By Steve Blitz, Chief US Economist

• FOMC sees economy growing as expected, but risks no longer “balanced”
• Ending QT now underscores their concerns about slowing growth
• Swapping MBS for Treasuries when QT stops is backdoor QE

4. Fed Reflates the ‘buyside Bubble’?

By Steve Blitz, Chief US Economist:

• Central banks, led by the Fed, have restored market bullishness
• But the December selloff could still be a taste of future trouble
• A decade of low interest rates has created a powerful search for yield

5. When Job ‘Quality’ Prevailed over ‘Headcount’

• A 387k decline in employment didn’t weigh on the jobless rate of 5.2% according to the latest labor survey data. As the labor participation rate declined in 4Q18, roughly 2.1mn of those in the labor pool voluntarily passed up the job search, to ease any employment demand-supply mismatch.

• For those employed particularly in the non-farm, production sectors led by manufacturing and construction, the quality of jobs generated dominated the lack of headcount gains in determining incomes, if not, uplifting purchasing power. If we exclude direct government job creation from the labor stats, we obtain a non-farm, private job creation of 1.1mn (vs 3Q18: -8.6k) up 3.8%YoY. Average weekly work hours were 43.2 versus 40.6 a year-ago suggesting more overtime work. Salaried workers grew by 1.4mn (+5.6%YoY) employed mainly from private establishments. Underemployment fell to 15.6% in the latest job survey vs 18% a year-ago.

• As inflation recedes, the robust non-farm employment and better job quality won’t be compelling for policymakers to rush any form of monetary accommodation. Since the jobs data or GDP prospects are not as vulnerable to sharp downswings due to onshore catalysts, e.g., upbeat public investments, consumption recovery, despite a less-than-encouraging global backdrop, the Central Bank may focus on possible risk of a liquidity crunch and emergence of positive, real interest rates in determining the policy options for monetary accommodation this year.

In this briefing:

1. Foreign Investment Law/Trade War/Huawei/Eu Vs PRC
2. Fed Optimism Dims with Sentiment
3. Fed Reflates the ‘buyside Bubble’?
4. When Job ‘Quality’ Prevailed over ‘Headcount’
5. China Economics:  China’s Strategy on Trade War Has Worked

1. Foreign Investment Law/Trade War/Huawei/Eu Vs PRC

China News That Matters

• NPC approves “rushed” foreign investment law
• Trump in no hurry as “China threat” grows 
• Huawei struggles to build trust
• EU takes a stand: China as “systemic rival”

2. Fed Optimism Dims with Sentiment

By Steve Blitz, Chief US Economist

• FOMC sees economy growing as expected, but risks no longer “balanced”
• Ending QT now underscores their concerns about slowing growth
• Swapping MBS for Treasuries when QT stops is backdoor QE

3. Fed Reflates the ‘buyside Bubble’?

By Steve Blitz, Chief US Economist:

• Central banks, led by the Fed, have restored market bullishness
• But the December selloff could still be a taste of future trouble
• A decade of low interest rates has created a powerful search for yield

4. When Job ‘Quality’ Prevailed over ‘Headcount’

• A 387k decline in employment didn’t weigh on the jobless rate of 5.2% according to the latest labor survey data. As the labor participation rate declined in 4Q18, roughly 2.1mn of those in the labor pool voluntarily passed up the job search, to ease any employment demand-supply mismatch.

• For those employed particularly in the non-farm, production sectors led by manufacturing and construction, the quality of jobs generated dominated the lack of headcount gains in determining incomes, if not, uplifting purchasing power. If we exclude direct government job creation from the labor stats, we obtain a non-farm, private job creation of 1.1mn (vs 3Q18: -8.6k) up 3.8%YoY. Average weekly work hours were 43.2 versus 40.6 a year-ago suggesting more overtime work. Salaried workers grew by 1.4mn (+5.6%YoY) employed mainly from private establishments. Underemployment fell to 15.6% in the latest job survey vs 18% a year-ago.

• As inflation recedes, the robust non-farm employment and better job quality won’t be compelling for policymakers to rush any form of monetary accommodation. Since the jobs data or GDP prospects are not as vulnerable to sharp downswings due to onshore catalysts, e.g., upbeat public investments, consumption recovery, despite a less-than-encouraging global backdrop, the Central Bank may focus on possible risk of a liquidity crunch and emergence of positive, real interest rates in determining the policy options for monetary accommodation this year.

5. China Economics:  China’s Strategy on Trade War Has Worked

First, during the past couple of weeks, the most important event regarding the Chinese economy is the China US trade talk.  It is reported that both sides have made a preliminary agreement on trade war truce. It is an extraordinary development.   At the beginning of this China US trade war, most analysts had underestimated the seriousness of this trade conflict. Then after a series of escalations, analysts tend to overestimate this conflict by exploring the possibility of a full-scale conflict between China and US including national security, military and economic competition etc. we agree that China and US are in direct competition in almost every field. The issue is President Trump. He has to deal with the internal issues including the Muller investigation and the Democrats. So far, he has failed to make essential progress in dealing with internal opponents. He also just failed another Kim Trump summit. In our opinion, he is keen to make a deal with China. He is in a much weaker position than President Xi. Although at the beginning President Xi was under some criticism, currently, his authority is with no significant challenge. President Xi has also pretended to be humble when dealing with Trump. In our opinion, China’s strategy, such as buying time by deliberate delays or deceptions, has worked. 

In this briefing:

1. FLASH: UK Denying No Deal Does Not Reduce Risk
2. UK Fiscal: Waiting While Brexit Burns
3. SHIBOR and Rates
4. Global Tech Breakup
5. UK Politics: Intransigence Meets Incompetence

1. FLASH: UK Denying No Deal Does Not Reduce Risk

• The UK parliament voted to reject leaving with no agreement, as widely expected. Shambolic management around that looks set to force ministerial resignation.
• Parliament continues to indulgence itself in motions against leaving the EU without a deal, but that doesn’t stop it being the default defined by current laws.
• I still see the relative probabilities of a deal, no deal, and no Brexit at 45:35:20.

2. UK Fiscal: Waiting While Brexit Burns

• The Spring Statement revealed marginally more fiscal room and no significant policy changes, consistent with the Chancellor’s intent to downgrade the event.
• Fiscal policy can respond to the Brexit outcome, despite total financing rising on a heavy redemption profile. Net liabilities look weirdly skewed away from gilts.
• Recent complaints about the RPI are being considered with a response planned for April. Changes to its use are more likely than to the measure’s methodology.

3. SHIBOR and Rates

There are two important points worth noting. First, China remains an overwhelmingly short term capital market from the money markets to structured deposits to bond duration which remain heavily tilted towards durations under five years. Second, what we are seeing in the money markets accords with the PBOC unofficial policy of trying to keep the headline rate unchanged but nudge down the unofficial rates.

4. Global Tech Breakup

By Eleanor Olcott, China Policy Analyst at TS Lombard

• Washington’s political drive to block Chinese access to US high-end tech is creating uncertainty in the industry
• The immediate effect is the redirection of Chinese VC money away from the US to Asian and European rivals
• The long-term trend is of  two rival centres of technology production- one focused on Shenzhen, the other on Silicon Valley

5. UK Politics: Intransigence Meets Incompetence

• The government has lost its second attempt to secure support for its Brexit deal by 149 votes, versus 230 first time. A Wednesday vote is set to reject no deal before one on Thursday leads the government to request an Article 50 extension.
• A third meaningful vote may arise as the cost of EU conditions is compared. An expensive extension to the summer is likely, though that may not thaw relations. An unlikely general election wouldn’t help, but a new Conservative PM might.
• Intransigent positions among an arguably incompetent current crop of political actors have significantly raised the risk of no deal. I now see the relative probabilities of a deal, no deal, and no Brexit at 45:35:20, versus 55:25:10.