Macro

In this briefing:

1. Why China’s Stimulus Will Disappoint
2. FLASH: UK GDP Resurgence Raises 1Q19 Forecast
3. Preview: UK Fiscal Spring Statement Beside Brexit
4. National People’s Congress/Political Loyalty/Trade War/Huawei Sues
5. US 5Y-1Y Yield Curve Inverts, but 10Y-2Y Suggests US Will Narrowly Avert 2020 Recession

1. Why China’s Stimulus Will Disappoint

By Lawrence Brainard, Chief Emerging Market Economist at TS Lombard

• In a Chinese version of QE the PBoC is flooding markets with liquidity
• Commercial banks will be slow to use it to boost lending to SMEs

2. FLASH: UK GDP Resurgence Raises 1Q19 Forecast

• UK monthly GDP exceeded all expectations by surging 0.5% m-o-m in Jan-19. Construction rebounded by even more than I expected, as did manufacturing, while services remained resilient relative to the biased surveys.
• The level of GDP is already 0.35% above the 4Q18 average, so I raise my forecast for 1Q19 by 0.1pp to 0.4% q-o-q. The BoE’s 0.2% forecast is looking woefully gloomy, although Brexit remains critical to the policy outlook.

3. Preview: UK Fiscal Spring Statement Beside Brexit

• The Spring Statement is intended to be more of a fiscal update than a significant event, and limited forecast changes further shrink its relevance, especially relative to Brexit. However, I expect the new remit for 2019-20 to be £128bn.
• Reforms to the RPI have become a market concern again, but now would be a terrible time for the Chancellor to rock the boat. A consultation could be launched into reforms of the index’s use, rather than construction, though.

4. National People’s Congress/Political Loyalty/Trade War/Huawei Sues

China News That Matters

• Still faster than most of the world
• Stick with Xi, if y’know what’s good for ya
• Trade deficit grows as war drags on 
• I’ll see you and raise you: Huawei sues Washington

5. US 5Y-1Y Yield Curve Inverts, but 10Y-2Y Suggests US Will Narrowly Avert 2020 Recession

The 5Y-1Y section of the US yield curve inverted sharply last week (aided by Friday’s weak NFP release), with the 5-year yield 11bp below the 1-year yield of 2.53%. (That yield spread was +1bp a week earlier). An inverted yield curve is a precursor of a recession 12-18 months later, so the probability of a US recession by 3Q 2020 is rising. However, the key predictor of a US recession is not the 5Y-1Y spread, but the 10Y-2Y spread — which remained rock-solid at 17bp last week (having fallen to that level on Monday 4th March from 23bp on Friday 1st March). The key predictor of US recessions has not yet inverted, so the most likely outcome still is that the US economy will weaken, but narrowly avert recession in 2020. 

The weak non-farm payrolls (NFP) report for February 2019 was largely in line with that outcome. Although February’s NFP increase of 20,000 was far below target, January was revised up to 311000, and the 3-month moving average of 186,000 is healthy for this late stage of the recovery. The US labour market remains tight, with the unemployment rate at 3.8% (and the broadest measure of unemployment falling to 7.3% from 8.1% in January). So wages rose 3.4% YoY in February 2019, the fastest during this 10-year recovery. Although the core PCE inflation rate is still tame at 1.9% YoY, wages are likely to exert mild upward pressure on core PCE inflation in the months ahead. But there will be little need for the Fed to raise rates in the next half year. 

The key cyclical component of the economy, manufacturing, lost momentum in February, with the ISM manufacturing PMI weakening to a 2-year low of 54.2, and the forward-looking new orders weakening to 55.5 — a moderation, but not a catastrophic number. December too was a soft month for manufacturing (with new orders at 51.3) so this bears watching. But the cyclical component of the US economy is still likely to be growing at just below potential in 3Q 2019. The ISM non-manufacturing PMI hit a 3-month high of 59.7 and its new orders component soared to 65.2 — suggesting that the services sector in the US remains in rude health. The weak February NFP will likely mean the continuance of mild weakness for the US$ against Asian and EM currencies (less so against the Euro). The US economy remains on course to lose momentum in 2020, growing less than 2% for the year — with 2H 2020 growth likely to be closer to 1%. The US will narrowly avert recession in 2020, but the economy will not be strong enough to ensure Trump’s re-election. 

In this briefing:

1. FLASH: UK GDP Resurgence Raises 1Q19 Forecast
2. Preview: UK Fiscal Spring Statement Beside Brexit
3. National People’s Congress/Political Loyalty/Trade War/Huawei Sues
4. US 5Y-1Y Yield Curve Inverts, but 10Y-2Y Suggests US Will Narrowly Avert 2020 Recession
5. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive

1. FLASH: UK GDP Resurgence Raises 1Q19 Forecast

• UK monthly GDP exceeded all expectations by surging 0.5% m-o-m in Jan-19. Construction rebounded by even more than I expected, as did manufacturing, while services remained resilient relative to the biased surveys.
• The level of GDP is already 0.35% above the 4Q18 average, so I raise my forecast for 1Q19 by 0.1pp to 0.4% q-o-q. The BoE’s 0.2% forecast is looking woefully gloomy, although Brexit remains critical to the policy outlook.

2. Preview: UK Fiscal Spring Statement Beside Brexit

• The Spring Statement is intended to be more of a fiscal update than a significant event, and limited forecast changes further shrink its relevance, especially relative to Brexit. However, I expect the new remit for 2019-20 to be £128bn.
• Reforms to the RPI have become a market concern again, but now would be a terrible time for the Chancellor to rock the boat. A consultation could be launched into reforms of the index’s use, rather than construction, though.

3. National People’s Congress/Political Loyalty/Trade War/Huawei Sues

China News That Matters

• Still faster than most of the world
• Stick with Xi, if y’know what’s good for ya
• Trade deficit grows as war drags on 
• I’ll see you and raise you: Huawei sues Washington

4. US 5Y-1Y Yield Curve Inverts, but 10Y-2Y Suggests US Will Narrowly Avert 2020 Recession

The 5Y-1Y section of the US yield curve inverted sharply last week (aided by Friday’s weak NFP release), with the 5-year yield 11bp below the 1-year yield of 2.53%. (That yield spread was +1bp a week earlier). An inverted yield curve is a precursor of a recession 12-18 months later, so the probability of a US recession by 3Q 2020 is rising. However, the key predictor of a US recession is not the 5Y-1Y spread, but the 10Y-2Y spread — which remained rock-solid at 17bp last week (having fallen to that level on Monday 4th March from 23bp on Friday 1st March). The key predictor of US recessions has not yet inverted, so the most likely outcome still is that the US economy will weaken, but narrowly avert recession in 2020. 

The weak non-farm payrolls (NFP) report for February 2019 was largely in line with that outcome. Although February’s NFP increase of 20,000 was far below target, January was revised up to 311000, and the 3-month moving average of 186,000 is healthy for this late stage of the recovery. The US labour market remains tight, with the unemployment rate at 3.8% (and the broadest measure of unemployment falling to 7.3% from 8.1% in January). So wages rose 3.4% YoY in February 2019, the fastest during this 10-year recovery. Although the core PCE inflation rate is still tame at 1.9% YoY, wages are likely to exert mild upward pressure on core PCE inflation in the months ahead. But there will be little need for the Fed to raise rates in the next half year. 

The key cyclical component of the economy, manufacturing, lost momentum in February, with the ISM manufacturing PMI weakening to a 2-year low of 54.2, and the forward-looking new orders weakening to 55.5 — a moderation, but not a catastrophic number. December too was a soft month for manufacturing (with new orders at 51.3) so this bears watching. But the cyclical component of the US economy is still likely to be growing at just below potential in 3Q 2019. The ISM non-manufacturing PMI hit a 3-month high of 59.7 and its new orders component soared to 65.2 — suggesting that the services sector in the US remains in rude health. The weak February NFP will likely mean the continuance of mild weakness for the US$ against Asian and EM currencies (less so against the Euro). The US economy remains on course to lose momentum in 2020, growing less than 2% for the year — with 2H 2020 growth likely to be closer to 1%. The US will narrowly avert recession in 2020, but the economy will not be strong enough to ensure Trump’s re-election. 

5. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive

• Capital flows are strongly Granger causal
• Gross capital flows lead World shipping activity by 4 months
• Capital flows have been slowly rising since June 2018: in February they jumped
• Reinforces out pro-Asia and pro-China investment message

In this briefing:

1. Preview: UK Fiscal Spring Statement Beside Brexit
2. National People’s Congress/Political Loyalty/Trade War/Huawei Sues
3. US 5Y-1Y Yield Curve Inverts, but 10Y-2Y Suggests US Will Narrowly Avert 2020 Recession
4. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive
5. Understanding the Widening of the U.S. Trade Deficit

1. Preview: UK Fiscal Spring Statement Beside Brexit

• The Spring Statement is intended to be more of a fiscal update than a significant event, and limited forecast changes further shrink its relevance, especially relative to Brexit. However, I expect the new remit for 2019-20 to be £128bn.
• Reforms to the RPI have become a market concern again, but now would be a terrible time for the Chancellor to rock the boat. A consultation could be launched into reforms of the index’s use, rather than construction, though.

2. National People’s Congress/Political Loyalty/Trade War/Huawei Sues

China News That Matters

• Still faster than most of the world
• Stick with Xi, if y’know what’s good for ya
• Trade deficit grows as war drags on 
• I’ll see you and raise you: Huawei sues Washington

3. US 5Y-1Y Yield Curve Inverts, but 10Y-2Y Suggests US Will Narrowly Avert 2020 Recession

The 5Y-1Y section of the US yield curve inverted sharply last week (aided by Friday’s weak NFP release), with the 5-year yield 11bp below the 1-year yield of 2.53%. (That yield spread was +1bp a week earlier). An inverted yield curve is a precursor of a recession 12-18 months later, so the probability of a US recession by 3Q 2020 is rising. However, the key predictor of a US recession is not the 5Y-1Y spread, but the 10Y-2Y spread — which remained rock-solid at 17bp last week (having fallen to that level on Monday 4th March from 23bp on Friday 1st March). The key predictor of US recessions has not yet inverted, so the most likely outcome still is that the US economy will weaken, but narrowly avert recession in 2020. 

The weak non-farm payrolls (NFP) report for February 2019 was largely in line with that outcome. Although February’s NFP increase of 20,000 was far below target, January was revised up to 311000, and the 3-month moving average of 186,000 is healthy for this late stage of the recovery. The US labour market remains tight, with the unemployment rate at 3.8% (and the broadest measure of unemployment falling to 7.3% from 8.1% in January). So wages rose 3.4% YoY in February 2019, the fastest during this 10-year recovery. Although the core PCE inflation rate is still tame at 1.9% YoY, wages are likely to exert mild upward pressure on core PCE inflation in the months ahead. But there will be little need for the Fed to raise rates in the next half year. 

The key cyclical component of the economy, manufacturing, lost momentum in February, with the ISM manufacturing PMI weakening to a 2-year low of 54.2, and the forward-looking new orders weakening to 55.5 — a moderation, but not a catastrophic number. December too was a soft month for manufacturing (with new orders at 51.3) so this bears watching. But the cyclical component of the US economy is still likely to be growing at just below potential in 3Q 2019. The ISM non-manufacturing PMI hit a 3-month high of 59.7 and its new orders component soared to 65.2 — suggesting that the services sector in the US remains in rude health. The weak February NFP will likely mean the continuance of mild weakness for the US$ against Asian and EM currencies (less so against the Euro). The US economy remains on course to lose momentum in 2020, growing less than 2% for the year — with 2H 2020 growth likely to be closer to 1%. The US will narrowly avert recession in 2020, but the economy will not be strong enough to ensure Trump’s re-election. 

4. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive

• Capital flows are strongly Granger causal
• Gross capital flows lead World shipping activity by 4 months
• Capital flows have been slowly rising since June 2018: in February they jumped
• Reinforces out pro-Asia and pro-China investment message

5. Understanding the Widening of the U.S. Trade Deficit

• The widening of the U.S. merchandise trade deficit to a record $891 billion in 2018 received considerable attention in the financial press this week but the criticisms that this widening represented either weakness in the U.S. economy or a failure of U.S. economic policy are misplaced.
• We expected a widening of the trade deficit in 2018 as a consequence of the tax cut and stronger economic growth.  Higher investment spending and a wider fiscal deficit were all but certain to lead to a larger trade gap.
• The dollar has firmed as the trade gap has widened over the last four years, which suggests the net overseas demand for U.S. assets has been rising faster than the current account deficit.

In this briefing:

1. National People’s Congress/Political Loyalty/Trade War/Huawei Sues
2. US 5Y-1Y Yield Curve Inverts, but 10Y-2Y Suggests US Will Narrowly Avert 2020 Recession
3. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive
4. Understanding the Widening of the U.S. Trade Deficit
5. Weak February Payrolls But U.S. Labor Market Is Still Tightening

1. National People’s Congress/Political Loyalty/Trade War/Huawei Sues

China News That Matters

• Still faster than most of the world
• Stick with Xi, if y’know what’s good for ya
• Trade deficit grows as war drags on 
• I’ll see you and raise you: Huawei sues Washington

2. US 5Y-1Y Yield Curve Inverts, but 10Y-2Y Suggests US Will Narrowly Avert 2020 Recession

The 5Y-1Y section of the US yield curve inverted sharply last week (aided by Friday’s weak NFP release), with the 5-year yield 11bp below the 1-year yield of 2.53%. (That yield spread was +1bp a week earlier). An inverted yield curve is a precursor of a recession 12-18 months later, so the probability of a US recession by 3Q 2020 is rising. However, the key predictor of a US recession is not the 5Y-1Y spread, but the 10Y-2Y spread — which remained rock-solid at 17bp last week (having fallen to that level on Monday 4th March from 23bp on Friday 1st March). The key predictor of US recessions has not yet inverted, so the most likely outcome still is that the US economy will weaken, but narrowly avert recession in 2020. 

The weak non-farm payrolls (NFP) report for February 2019 was largely in line with that outcome. Although February’s NFP increase of 20,000 was far below target, January was revised up to 311000, and the 3-month moving average of 186,000 is healthy for this late stage of the recovery. The US labour market remains tight, with the unemployment rate at 3.8% (and the broadest measure of unemployment falling to 7.3% from 8.1% in January). So wages rose 3.4% YoY in February 2019, the fastest during this 10-year recovery. Although the core PCE inflation rate is still tame at 1.9% YoY, wages are likely to exert mild upward pressure on core PCE inflation in the months ahead. But there will be little need for the Fed to raise rates in the next half year. 

The key cyclical component of the economy, manufacturing, lost momentum in February, with the ISM manufacturing PMI weakening to a 2-year low of 54.2, and the forward-looking new orders weakening to 55.5 — a moderation, but not a catastrophic number. December too was a soft month for manufacturing (with new orders at 51.3) so this bears watching. But the cyclical component of the US economy is still likely to be growing at just below potential in 3Q 2019. The ISM non-manufacturing PMI hit a 3-month high of 59.7 and its new orders component soared to 65.2 — suggesting that the services sector in the US remains in rude health. The weak February NFP will likely mean the continuance of mild weakness for the US$ against Asian and EM currencies (less so against the Euro). The US economy remains on course to lose momentum in 2020, growing less than 2% for the year — with 2H 2020 growth likely to be closer to 1%. The US will narrowly avert recession in 2020, but the economy will not be strong enough to ensure Trump’s re-election. 

3. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive

• Capital flows are strongly Granger causal
• Gross capital flows lead World shipping activity by 4 months
• Capital flows have been slowly rising since June 2018: in February they jumped
• Reinforces out pro-Asia and pro-China investment message

4. Understanding the Widening of the U.S. Trade Deficit

• The widening of the U.S. merchandise trade deficit to a record $891 billion in 2018 received considerable attention in the financial press this week but the criticisms that this widening represented either weakness in the U.S. economy or a failure of U.S. economic policy are misplaced.
• We expected a widening of the trade deficit in 2018 as a consequence of the tax cut and stronger economic growth.  Higher investment spending and a wider fiscal deficit were all but certain to lead to a larger trade gap.
• The dollar has firmed as the trade gap has widened over the last four years, which suggests the net overseas demand for U.S. assets has been rising faster than the current account deficit.

5. Weak February Payrolls But U.S. Labor Market Is Still Tightening

Nonfarm payrolls rose only 20,000 in February but the unemployment rate declined to 3.8% from 4.0%.  Average hourly earnings increased 0.4% and year-over-year wage growth picked up.  Monthly payroll changes are highly volatile and the three-month average of payroll growth is 186,000, which is still solid.  Also, most metrics show that the labor market tightened in February.

In this briefing:

1. US 5Y-1Y Yield Curve Inverts, but 10Y-2Y Suggests US Will Narrowly Avert 2020 Recession
2. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive
3. Understanding the Widening of the U.S. Trade Deficit
4. Weak February Payrolls But U.S. Labor Market Is Still Tightening
5. Philippines: February Inflation Eases Back to BSP’s Inflation Target Range

1. US 5Y-1Y Yield Curve Inverts, but 10Y-2Y Suggests US Will Narrowly Avert 2020 Recession

The 5Y-1Y section of the US yield curve inverted sharply last week (aided by Friday’s weak NFP release), with the 5-year yield 11bp below the 1-year yield of 2.53%. (That yield spread was +1bp a week earlier). An inverted yield curve is a precursor of a recession 12-18 months later, so the probability of a US recession by 3Q 2020 is rising. However, the key predictor of a US recession is not the 5Y-1Y spread, but the 10Y-2Y spread — which remained rock-solid at 17bp last week (having fallen to that level on Monday 4th March from 23bp on Friday 1st March). The key predictor of US recessions has not yet inverted, so the most likely outcome still is that the US economy will weaken, but narrowly avert recession in 2020. 

The weak non-farm payrolls (NFP) report for February 2019 was largely in line with that outcome. Although February’s NFP increase of 20,000 was far below target, January was revised up to 311000, and the 3-month moving average of 186,000 is healthy for this late stage of the recovery. The US labour market remains tight, with the unemployment rate at 3.8% (and the broadest measure of unemployment falling to 7.3% from 8.1% in January). So wages rose 3.4% YoY in February 2019, the fastest during this 10-year recovery. Although the core PCE inflation rate is still tame at 1.9% YoY, wages are likely to exert mild upward pressure on core PCE inflation in the months ahead. But there will be little need for the Fed to raise rates in the next half year. 

The key cyclical component of the economy, manufacturing, lost momentum in February, with the ISM manufacturing PMI weakening to a 2-year low of 54.2, and the forward-looking new orders weakening to 55.5 — a moderation, but not a catastrophic number. December too was a soft month for manufacturing (with new orders at 51.3) so this bears watching. But the cyclical component of the US economy is still likely to be growing at just below potential in 3Q 2019. The ISM non-manufacturing PMI hit a 3-month high of 59.7 and its new orders component soared to 65.2 — suggesting that the services sector in the US remains in rude health. The weak February NFP will likely mean the continuance of mild weakness for the US$ against Asian and EM currencies (less so against the Euro). The US economy remains on course to lose momentum in 2020, growing less than 2% for the year — with 2H 2020 growth likely to be closer to 1%. The US will narrowly avert recession in 2020, but the economy will not be strong enough to ensure Trump’s re-election. 

2. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive

• Capital flows are strongly Granger causal
• Gross capital flows lead World shipping activity by 4 months
• Capital flows have been slowly rising since June 2018: in February they jumped
• Reinforces out pro-Asia and pro-China investment message

3. Understanding the Widening of the U.S. Trade Deficit

• The widening of the U.S. merchandise trade deficit to a record $891 billion in 2018 received considerable attention in the financial press this week but the criticisms that this widening represented either weakness in the U.S. economy or a failure of U.S. economic policy are misplaced.
• We expected a widening of the trade deficit in 2018 as a consequence of the tax cut and stronger economic growth.  Higher investment spending and a wider fiscal deficit were all but certain to lead to a larger trade gap.
• The dollar has firmed as the trade gap has widened over the last four years, which suggests the net overseas demand for U.S. assets has been rising faster than the current account deficit.

4. Weak February Payrolls But U.S. Labor Market Is Still Tightening

Nonfarm payrolls rose only 20,000 in February but the unemployment rate declined to 3.8% from 4.0%.  Average hourly earnings increased 0.4% and year-over-year wage growth picked up.  Monthly payroll changes are highly volatile and the three-month average of payroll growth is 186,000, which is still solid.  Also, most metrics show that the labor market tightened in February.

5. Philippines: February Inflation Eases Back to BSP’s Inflation Target Range

• Better-than-expected February inflation of 3.8%YoY wasn’t just a ‘base effect’ result. Broad food and transport CPI readings probably benefited from a year-ago, statistical high. It’s not the same for most of the non-food CPI items like rental & household utilities, and restaurant & miscellaneous goods & services that comprise discretionary expenditures. Lacking the base effect, inflation within this group seemed to have shed off last year’s price catalysts led by TRAIN’s excise hikes, high oil prices and supply shocks. 

• Based on the PSA’s seasonally adjusted data, headline inflation’s annualized pace was a benign 1.2%.

• Our updated monthly time series extrapolation showed headline inflation bottoming out at 1.3%YoY-1.4%YoY in September-October this year.

• Sustained liquidity tightness amid inflation’s benign pace with a trajectory settling in the BSP’s target range could facilitate a staggered bank reserve ratio cut of 2% starting 2Q19.   

• With the pro-growth bias of newly appointed BSP chief Benjamin Diokno (former Budget Secretary), the likelihood of a 25bp policy rate cut has been elevated in 3Q19 when inflation this year is expected to hit rock bottom and the ensuing size of positive, real interest rates could risk threatening growth.
• Considering potential macro upsides this year, e.g., inflation bottoming out alongside consumption recovery, buying risk assets on dips is still the norm.

In this briefing:

1. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive
2. Understanding the Widening of the U.S. Trade Deficit
3. Weak February Payrolls But U.S. Labor Market Is Still Tightening
4. Philippines: February Inflation Eases Back to BSP’s Inflation Target Range
5. Japan – Chinese Flu

1. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive

• Capital flows are strongly Granger causal
• Gross capital flows lead World shipping activity by 4 months
• Capital flows have been slowly rising since June 2018: in February they jumped
• Reinforces out pro-Asia and pro-China investment message

2. Understanding the Widening of the U.S. Trade Deficit

• The widening of the U.S. merchandise trade deficit to a record $891 billion in 2018 received considerable attention in the financial press this week but the criticisms that this widening represented either weakness in the U.S. economy or a failure of U.S. economic policy are misplaced.
• We expected a widening of the trade deficit in 2018 as a consequence of the tax cut and stronger economic growth.  Higher investment spending and a wider fiscal deficit were all but certain to lead to a larger trade gap.
• The dollar has firmed as the trade gap has widened over the last four years, which suggests the net overseas demand for U.S. assets has been rising faster than the current account deficit.

3. Weak February Payrolls But U.S. Labor Market Is Still Tightening

Nonfarm payrolls rose only 20,000 in February but the unemployment rate declined to 3.8% from 4.0%.  Average hourly earnings increased 0.4% and year-over-year wage growth picked up.  Monthly payroll changes are highly volatile and the three-month average of payroll growth is 186,000, which is still solid.  Also, most metrics show that the labor market tightened in February.

4. Philippines: February Inflation Eases Back to BSP’s Inflation Target Range

• Better-than-expected February inflation of 3.8%YoY wasn’t just a ‘base effect’ result. Broad food and transport CPI readings probably benefited from a year-ago, statistical high. It’s not the same for most of the non-food CPI items like rental & household utilities, and restaurant & miscellaneous goods & services that comprise discretionary expenditures. Lacking the base effect, inflation within this group seemed to have shed off last year’s price catalysts led by TRAIN’s excise hikes, high oil prices and supply shocks. 

• Based on the PSA’s seasonally adjusted data, headline inflation’s annualized pace was a benign 1.2%.

• Our updated monthly time series extrapolation showed headline inflation bottoming out at 1.3%YoY-1.4%YoY in September-October this year.

• Sustained liquidity tightness amid inflation’s benign pace with a trajectory settling in the BSP’s target range could facilitate a staggered bank reserve ratio cut of 2% starting 2Q19.   

• With the pro-growth bias of newly appointed BSP chief Benjamin Diokno (former Budget Secretary), the likelihood of a 25bp policy rate cut has been elevated in 3Q19 when inflation this year is expected to hit rock bottom and the ensuing size of positive, real interest rates could risk threatening growth.
• Considering potential macro upsides this year, e.g., inflation bottoming out alongside consumption recovery, buying risk assets on dips is still the norm.

5. Japan – Chinese Flu

By Konstantinos Venetis, Senior Economist

• Japan skirts recession but near-term prospects remain weak
• Deflationary headwinds to persist in H1, threatening business spending
• Recovery likely in late 2019 as world trade finds a firmer footing

In this briefing:

1. Understanding the Widening of the U.S. Trade Deficit
2. Weak February Payrolls But U.S. Labor Market Is Still Tightening
3. Philippines: February Inflation Eases Back to BSP’s Inflation Target Range
4. Japan – Chinese Flu
5. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested

1. Understanding the Widening of the U.S. Trade Deficit

• The widening of the U.S. merchandise trade deficit to a record $891 billion in 2018 received considerable attention in the financial press this week but the criticisms that this widening represented either weakness in the U.S. economy or a failure of U.S. economic policy are misplaced.
• We expected a widening of the trade deficit in 2018 as a consequence of the tax cut and stronger economic growth.  Higher investment spending and a wider fiscal deficit were all but certain to lead to a larger trade gap.
• The dollar has firmed as the trade gap has widened over the last four years, which suggests the net overseas demand for U.S. assets has been rising faster than the current account deficit.

2. Weak February Payrolls But U.S. Labor Market Is Still Tightening

Nonfarm payrolls rose only 20,000 in February but the unemployment rate declined to 3.8% from 4.0%.  Average hourly earnings increased 0.4% and year-over-year wage growth picked up.  Monthly payroll changes are highly volatile and the three-month average of payroll growth is 186,000, which is still solid.  Also, most metrics show that the labor market tightened in February.

3. Philippines: February Inflation Eases Back to BSP’s Inflation Target Range

• Better-than-expected February inflation of 3.8%YoY wasn’t just a ‘base effect’ result. Broad food and transport CPI readings probably benefited from a year-ago, statistical high. It’s not the same for most of the non-food CPI items like rental & household utilities, and restaurant & miscellaneous goods & services that comprise discretionary expenditures. Lacking the base effect, inflation within this group seemed to have shed off last year’s price catalysts led by TRAIN’s excise hikes, high oil prices and supply shocks. 

• Based on the PSA’s seasonally adjusted data, headline inflation’s annualized pace was a benign 1.2%.

• Our updated monthly time series extrapolation showed headline inflation bottoming out at 1.3%YoY-1.4%YoY in September-October this year.

• Sustained liquidity tightness amid inflation’s benign pace with a trajectory settling in the BSP’s target range could facilitate a staggered bank reserve ratio cut of 2% starting 2Q19.   

• With the pro-growth bias of newly appointed BSP chief Benjamin Diokno (former Budget Secretary), the likelihood of a 25bp policy rate cut has been elevated in 3Q19 when inflation this year is expected to hit rock bottom and the ensuing size of positive, real interest rates could risk threatening growth.
• Considering potential macro upsides this year, e.g., inflation bottoming out alongside consumption recovery, buying risk assets on dips is still the norm.

4. Japan – Chinese Flu

By Konstantinos Venetis, Senior Economist

• Japan skirts recession but near-term prospects remain weak
• Deflationary headwinds to persist in H1, threatening business spending
• Recovery likely in late 2019 as world trade finds a firmer footing

5. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested

A credible poll — the first new trustworthy data in a month — shows Widodo having expanded his lead to 59 percent, versus 31 percent for Prabowo.  The latter’s prospects are dim.  Indonesia’s Comprehensive Partnership (Cepa) with Australia will bring myriad import prices down — although, contrary to a spate of international press reports, it does not raise ownership ceilings for Australian investors.  A senior activist with Amnesty International Indonesia suffered arrest for critizing the military’s plan to place hundreds of active officers in civilian posts.  The BKPM’s OSS system for online permiting is making progress, although its smooth functioning remains a distanct prospect.

Politics: President Joko Widodo proposed monthly income support for graduates of vocational programs who lack immediate employment and need to search for jobs.  He did not specify an amount per recipient.  The proposal has some merit – but simple regulatory changes to facilitate investment and job‑creation would obviate its need.  Politically, the concept will likely prove popular, further boosting Widodo (Page 2).  A prominent Partai Demokrat official, Andi Arief, left the party to undergo drug rehabilitation.  This marks yet another blow for a party that had been Indonesia’s largest only five years ago (p. 3).  A human rights activist and lecturer suffered arrest for allegedly defaming the military (p. 4). 

Surveys: In the first new poll data to emerge in over a month, the Survey Network (LSI) showed that, as of late February, nationwide support for Widodo stood at 59 percent, versus 31 percent for Gerindra Chair Prabowo Subianto.  The findings, which are credible, suggest that Widodo strengthened during February, perhaps due to the two televised debates – and despite Prabowo’s emphatic attempts to provoke various economic fears.  The data portray Prabowo’s prospects as distinctly remote.  A Widodo landslide would further reduce the likelihood of disruption or unrest, as Prabowo‑camp claims of fraud or manipulation would lack credence.  Meanwhile, Widodo would emerge with an unequivocal mandate and particularly strong political capital.  Parties that defy him would jeopardize their own image.  But whether he would use this strength effectively is questionable (p. 5).  Findings from Polmark, a somewhat obscure firm employed by the National Mandate Party (Pan), claim that Widodo’s margin over Prabowo is only 15 percentage points – but the poll is old, it has a large error margin and it featured a 34 percent level of undecided respondents.  As a percen­tage of decided respondents, Widodo’s support is comparable to other (and better) polls (p. 6). 

Justice: In the first verdicts in Lippo’s Meikarta scandal, four Lippo personnel including Billy Sindoro received sentences ranging from 1.5‑3.5 years each.  This is Sindoro’s second conviction from the Anti-Corruption Commission (KPK) (p. 8).

Policy News: A new phase of implementation is underway for online permitting (p. 8).

International: During an election that features strident economic critiques, the govern­ment concluded the Comprehensive Economic Partnership with Australia (IA‑Cepa).  Parties may yet posture when it comes due for ratifi­cation, but other trade agreements have managed to pass.  The IA-Cepa reduces tariffs on myriad Australian goods from five percent to zero, while higher tariffs on certain foods will fall precipitously.  Contrary to reports, it sets no new foreign ownership ceilings (p. 8). 

In this briefing:

1. Weak February Payrolls But U.S. Labor Market Is Still Tightening
2. Philippines: February Inflation Eases Back to BSP’s Inflation Target Range
3. Japan – Chinese Flu
4. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested
5. Futures and Spot Opportunities

1. Weak February Payrolls But U.S. Labor Market Is Still Tightening

Nonfarm payrolls rose only 20,000 in February but the unemployment rate declined to 3.8% from 4.0%.  Average hourly earnings increased 0.4% and year-over-year wage growth picked up.  Monthly payroll changes are highly volatile and the three-month average of payroll growth is 186,000, which is still solid.  Also, most metrics show that the labor market tightened in February.

2. Philippines: February Inflation Eases Back to BSP’s Inflation Target Range

• Better-than-expected February inflation of 3.8%YoY wasn’t just a ‘base effect’ result. Broad food and transport CPI readings probably benefited from a year-ago, statistical high. It’s not the same for most of the non-food CPI items like rental & household utilities, and restaurant & miscellaneous goods & services that comprise discretionary expenditures. Lacking the base effect, inflation within this group seemed to have shed off last year’s price catalysts led by TRAIN’s excise hikes, high oil prices and supply shocks. 

• Based on the PSA’s seasonally adjusted data, headline inflation’s annualized pace was a benign 1.2%.

• Our updated monthly time series extrapolation showed headline inflation bottoming out at 1.3%YoY-1.4%YoY in September-October this year.

• Sustained liquidity tightness amid inflation’s benign pace with a trajectory settling in the BSP’s target range could facilitate a staggered bank reserve ratio cut of 2% starting 2Q19.   

• With the pro-growth bias of newly appointed BSP chief Benjamin Diokno (former Budget Secretary), the likelihood of a 25bp policy rate cut has been elevated in 3Q19 when inflation this year is expected to hit rock bottom and the ensuing size of positive, real interest rates could risk threatening growth.
• Considering potential macro upsides this year, e.g., inflation bottoming out alongside consumption recovery, buying risk assets on dips is still the norm.

3. Japan – Chinese Flu

By Konstantinos Venetis, Senior Economist

• Japan skirts recession but near-term prospects remain weak
• Deflationary headwinds to persist in H1, threatening business spending
• Recovery likely in late 2019 as world trade finds a firmer footing

4. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested

A credible poll — the first new trustworthy data in a month — shows Widodo having expanded his lead to 59 percent, versus 31 percent for Prabowo.  The latter’s prospects are dim.  Indonesia’s Comprehensive Partnership (Cepa) with Australia will bring myriad import prices down — although, contrary to a spate of international press reports, it does not raise ownership ceilings for Australian investors.  A senior activist with Amnesty International Indonesia suffered arrest for critizing the military’s plan to place hundreds of active officers in civilian posts.  The BKPM’s OSS system for online permiting is making progress, although its smooth functioning remains a distanct prospect.

Politics: President Joko Widodo proposed monthly income support for graduates of vocational programs who lack immediate employment and need to search for jobs.  He did not specify an amount per recipient.  The proposal has some merit – but simple regulatory changes to facilitate investment and job‑creation would obviate its need.  Politically, the concept will likely prove popular, further boosting Widodo (Page 2).  A prominent Partai Demokrat official, Andi Arief, left the party to undergo drug rehabilitation.  This marks yet another blow for a party that had been Indonesia’s largest only five years ago (p. 3).  A human rights activist and lecturer suffered arrest for allegedly defaming the military (p. 4). 

Surveys: In the first new poll data to emerge in over a month, the Survey Network (LSI) showed that, as of late February, nationwide support for Widodo stood at 59 percent, versus 31 percent for Gerindra Chair Prabowo Subianto.  The findings, which are credible, suggest that Widodo strengthened during February, perhaps due to the two televised debates – and despite Prabowo’s emphatic attempts to provoke various economic fears.  The data portray Prabowo’s prospects as distinctly remote.  A Widodo landslide would further reduce the likelihood of disruption or unrest, as Prabowo‑camp claims of fraud or manipulation would lack credence.  Meanwhile, Widodo would emerge with an unequivocal mandate and particularly strong political capital.  Parties that defy him would jeopardize their own image.  But whether he would use this strength effectively is questionable (p. 5).  Findings from Polmark, a somewhat obscure firm employed by the National Mandate Party (Pan), claim that Widodo’s margin over Prabowo is only 15 percentage points – but the poll is old, it has a large error margin and it featured a 34 percent level of undecided respondents.  As a percen­tage of decided respondents, Widodo’s support is comparable to other (and better) polls (p. 6). 

Justice: In the first verdicts in Lippo’s Meikarta scandal, four Lippo personnel including Billy Sindoro received sentences ranging from 1.5‑3.5 years each.  This is Sindoro’s second conviction from the Anti-Corruption Commission (KPK) (p. 8).

Policy News: A new phase of implementation is underway for online permitting (p. 8).

International: During an election that features strident economic critiques, the govern­ment concluded the Comprehensive Economic Partnership with Australia (IA‑Cepa).  Parties may yet posture when it comes due for ratifi­cation, but other trade agreements have managed to pass.  The IA-Cepa reduces tariffs on myriad Australian goods from five percent to zero, while higher tariffs on certain foods will fall precipitously.  Contrary to reports, it sets no new foreign ownership ceilings (p. 8). 

5. Futures and Spot Opportunities

Liquidity is driving the futures market to push up iron ore. We know futures trading is very active. This tells us we are not the only ones who noticed the divergence and are looking to capitalize.The fundamental issue is that we expect the futures and spot are back together after being seeing a gap. 

In this briefing:

1. Philippines: February Inflation Eases Back to BSP’s Inflation Target Range
2. Japan – Chinese Flu
3. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested
4. Futures and Spot Opportunities
5. Low Core Inflation and Favourable Supply-Side Dynamics: Key to a Benign Fed Policy Outlook

1. Philippines: February Inflation Eases Back to BSP’s Inflation Target Range

• Better-than-expected February inflation of 3.8%YoY wasn’t just a ‘base effect’ result. Broad food and transport CPI readings probably benefited from a year-ago, statistical high. It’s not the same for most of the non-food CPI items like rental & household utilities, and restaurant & miscellaneous goods & services that comprise discretionary expenditures. Lacking the base effect, inflation within this group seemed to have shed off last year’s price catalysts led by TRAIN’s excise hikes, high oil prices and supply shocks. 

• Based on the PSA’s seasonally adjusted data, headline inflation’s annualized pace was a benign 1.2%.

• Our updated monthly time series extrapolation showed headline inflation bottoming out at 1.3%YoY-1.4%YoY in September-October this year.

• Sustained liquidity tightness amid inflation’s benign pace with a trajectory settling in the BSP’s target range could facilitate a staggered bank reserve ratio cut of 2% starting 2Q19.   

• With the pro-growth bias of newly appointed BSP chief Benjamin Diokno (former Budget Secretary), the likelihood of a 25bp policy rate cut has been elevated in 3Q19 when inflation this year is expected to hit rock bottom and the ensuing size of positive, real interest rates could risk threatening growth.
• Considering potential macro upsides this year, e.g., inflation bottoming out alongside consumption recovery, buying risk assets on dips is still the norm.

2. Japan – Chinese Flu

By Konstantinos Venetis, Senior Economist

• Japan skirts recession but near-term prospects remain weak
• Deflationary headwinds to persist in H1, threatening business spending
• Recovery likely in late 2019 as world trade finds a firmer footing

3. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested

A credible poll — the first new trustworthy data in a month — shows Widodo having expanded his lead to 59 percent, versus 31 percent for Prabowo.  The latter’s prospects are dim.  Indonesia’s Comprehensive Partnership (Cepa) with Australia will bring myriad import prices down — although, contrary to a spate of international press reports, it does not raise ownership ceilings for Australian investors.  A senior activist with Amnesty International Indonesia suffered arrest for critizing the military’s plan to place hundreds of active officers in civilian posts.  The BKPM’s OSS system for online permiting is making progress, although its smooth functioning remains a distanct prospect.

Politics: President Joko Widodo proposed monthly income support for graduates of vocational programs who lack immediate employment and need to search for jobs.  He did not specify an amount per recipient.  The proposal has some merit – but simple regulatory changes to facilitate investment and job‑creation would obviate its need.  Politically, the concept will likely prove popular, further boosting Widodo (Page 2).  A prominent Partai Demokrat official, Andi Arief, left the party to undergo drug rehabilitation.  This marks yet another blow for a party that had been Indonesia’s largest only five years ago (p. 3).  A human rights activist and lecturer suffered arrest for allegedly defaming the military (p. 4). 

Surveys: In the first new poll data to emerge in over a month, the Survey Network (LSI) showed that, as of late February, nationwide support for Widodo stood at 59 percent, versus 31 percent for Gerindra Chair Prabowo Subianto.  The findings, which are credible, suggest that Widodo strengthened during February, perhaps due to the two televised debates – and despite Prabowo’s emphatic attempts to provoke various economic fears.  The data portray Prabowo’s prospects as distinctly remote.  A Widodo landslide would further reduce the likelihood of disruption or unrest, as Prabowo‑camp claims of fraud or manipulation would lack credence.  Meanwhile, Widodo would emerge with an unequivocal mandate and particularly strong political capital.  Parties that defy him would jeopardize their own image.  But whether he would use this strength effectively is questionable (p. 5).  Findings from Polmark, a somewhat obscure firm employed by the National Mandate Party (Pan), claim that Widodo’s margin over Prabowo is only 15 percentage points – but the poll is old, it has a large error margin and it featured a 34 percent level of undecided respondents.  As a percen­tage of decided respondents, Widodo’s support is comparable to other (and better) polls (p. 6). 

Justice: In the first verdicts in Lippo’s Meikarta scandal, four Lippo personnel including Billy Sindoro received sentences ranging from 1.5‑3.5 years each.  This is Sindoro’s second conviction from the Anti-Corruption Commission (KPK) (p. 8).

Policy News: A new phase of implementation is underway for online permitting (p. 8).

International: During an election that features strident economic critiques, the govern­ment concluded the Comprehensive Economic Partnership with Australia (IA‑Cepa).  Parties may yet posture when it comes due for ratifi­cation, but other trade agreements have managed to pass.  The IA-Cepa reduces tariffs on myriad Australian goods from five percent to zero, while higher tariffs on certain foods will fall precipitously.  Contrary to reports, it sets no new foreign ownership ceilings (p. 8). 

4. Futures and Spot Opportunities

Liquidity is driving the futures market to push up iron ore. We know futures trading is very active. This tells us we are not the only ones who noticed the divergence and are looking to capitalize.The fundamental issue is that we expect the futures and spot are back together after being seeing a gap. 

5. Low Core Inflation and Favourable Supply-Side Dynamics: Key to a Benign Fed Policy Outlook

By embracing a patient policy approach, the Federal Open Market Committee (FOMC) imparted a positive shock to markets that has successfully banished investors’ fears of looming recession that prevailed in Q4. 

Meanwhile, the Federal Reserve Bank of New York’s Underlying Inflation Gauge suggests the future core inflation backdrop will not present a significant hurdle for the FOMC to ease policy if necessary.

Financial markets have firmly embraced a Goldilocks economic scenario that precludes further Fed action which will be ultimately beneficial for risky assets.

Fed Vice Chair Clarida has hinted at a potential tolerance for inflation overshooting the 2% target as part of an overall “makeup” strategy to compensate for persistent undershooting that has produced sticky inflationary expectations.

Ultimately, supply-side developments in the economy could determine the endgame for Fed policy and, consequently, the cycle by deferring the arrival of overheating.

In this briefing:

1. Japan – Chinese Flu
2. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested
3. Futures and Spot Opportunities
4. Low Core Inflation and Favourable Supply-Side Dynamics: Key to a Benign Fed Policy Outlook
5. Taiwan Investors Factor In China Recovery

1. Japan – Chinese Flu

By Konstantinos Venetis, Senior Economist

• Japan skirts recession but near-term prospects remain weak
• Deflationary headwinds to persist in H1, threatening business spending
• Recovery likely in late 2019 as world trade finds a firmer footing

2. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested

A credible poll — the first new trustworthy data in a month — shows Widodo having expanded his lead to 59 percent, versus 31 percent for Prabowo.  The latter’s prospects are dim.  Indonesia’s Comprehensive Partnership (Cepa) with Australia will bring myriad import prices down — although, contrary to a spate of international press reports, it does not raise ownership ceilings for Australian investors.  A senior activist with Amnesty International Indonesia suffered arrest for critizing the military’s plan to place hundreds of active officers in civilian posts.  The BKPM’s OSS system for online permiting is making progress, although its smooth functioning remains a distanct prospect.

Politics: President Joko Widodo proposed monthly income support for graduates of vocational programs who lack immediate employment and need to search for jobs.  He did not specify an amount per recipient.  The proposal has some merit – but simple regulatory changes to facilitate investment and job‑creation would obviate its need.  Politically, the concept will likely prove popular, further boosting Widodo (Page 2).  A prominent Partai Demokrat official, Andi Arief, left the party to undergo drug rehabilitation.  This marks yet another blow for a party that had been Indonesia’s largest only five years ago (p. 3).  A human rights activist and lecturer suffered arrest for allegedly defaming the military (p. 4). 

Surveys: In the first new poll data to emerge in over a month, the Survey Network (LSI) showed that, as of late February, nationwide support for Widodo stood at 59 percent, versus 31 percent for Gerindra Chair Prabowo Subianto.  The findings, which are credible, suggest that Widodo strengthened during February, perhaps due to the two televised debates – and despite Prabowo’s emphatic attempts to provoke various economic fears.  The data portray Prabowo’s prospects as distinctly remote.  A Widodo landslide would further reduce the likelihood of disruption or unrest, as Prabowo‑camp claims of fraud or manipulation would lack credence.  Meanwhile, Widodo would emerge with an unequivocal mandate and particularly strong political capital.  Parties that defy him would jeopardize their own image.  But whether he would use this strength effectively is questionable (p. 5).  Findings from Polmark, a somewhat obscure firm employed by the National Mandate Party (Pan), claim that Widodo’s margin over Prabowo is only 15 percentage points – but the poll is old, it has a large error margin and it featured a 34 percent level of undecided respondents.  As a percen­tage of decided respondents, Widodo’s support is comparable to other (and better) polls (p. 6). 

Justice: In the first verdicts in Lippo’s Meikarta scandal, four Lippo personnel including Billy Sindoro received sentences ranging from 1.5‑3.5 years each.  This is Sindoro’s second conviction from the Anti-Corruption Commission (KPK) (p. 8).

Policy News: A new phase of implementation is underway for online permitting (p. 8).

International: During an election that features strident economic critiques, the govern­ment concluded the Comprehensive Economic Partnership with Australia (IA‑Cepa).  Parties may yet posture when it comes due for ratifi­cation, but other trade agreements have managed to pass.  The IA-Cepa reduces tariffs on myriad Australian goods from five percent to zero, while higher tariffs on certain foods will fall precipitously.  Contrary to reports, it sets no new foreign ownership ceilings (p. 8). 

3. Futures and Spot Opportunities

Liquidity is driving the futures market to push up iron ore. We know futures trading is very active. This tells us we are not the only ones who noticed the divergence and are looking to capitalize.The fundamental issue is that we expect the futures and spot are back together after being seeing a gap. 

4. Low Core Inflation and Favourable Supply-Side Dynamics: Key to a Benign Fed Policy Outlook

By embracing a patient policy approach, the Federal Open Market Committee (FOMC) imparted a positive shock to markets that has successfully banished investors’ fears of looming recession that prevailed in Q4. 

Meanwhile, the Federal Reserve Bank of New York’s Underlying Inflation Gauge suggests the future core inflation backdrop will not present a significant hurdle for the FOMC to ease policy if necessary.

Financial markets have firmly embraced a Goldilocks economic scenario that precludes further Fed action which will be ultimately beneficial for risky assets.

Fed Vice Chair Clarida has hinted at a potential tolerance for inflation overshooting the 2% target as part of an overall “makeup” strategy to compensate for persistent undershooting that has produced sticky inflationary expectations.

Ultimately, supply-side developments in the economy could determine the endgame for Fed policy and, consequently, the cycle by deferring the arrival of overheating.

5. Taiwan Investors Factor In China Recovery

It is time to go increase exposure to Taiwanese equities, if you haven’t already. Like bourses around the region, Taiwan’s stock market has rebounded from its January low and is up over 10% in two months. Underpinning our and investor optimism are expectations that Taiwan stands to benefit disproportionately from the fiscal and monetary policy easing underway in China,  that China and the US will get to some kind of trade deal and a positive reaction to TSMC’s 2019 dividend pay-out plan.