In today’s briefing:
- Modern Monetary Theory (MMT) Revisited
- CX Daily: Chinese Shippers’ Diverging Fortunes
- Indonesia Economics: Even with Headline Stability, Watch for More Policy Uncertainty
- [IO Weekly 2024/32] Chinese Economic Sentiment Sours, Driving Iron Ore Lower; Option Activity Surges
- Fundamental Changes Reflected from Recent Market Turbulence
- Taiwan: Rates to Buck Global Loosening as Growth Stays Robust and Inflation Too High
- UK Services CPI Realigns With Trend
- New Zealand Policy Rate 5.25% (consensus 5.5%) in Aug-24
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Modern Monetary Theory (MMT) Revisited
- The inflationary implications of Modern Monetary theory have finally been exposed in the aftermath of the COVID-19 pandemic after 2022
- The risks of inflation were underplayed due to prolonged disinflationary impulses stemming from decades of globalisation. Recent US practice of MMT could force the Fed to raise its inflation target.
- Japan pursued an MMT framework since 2013, but the continuation of quantitative easing and arrival of rising inflation is undermining the yen. The Eurozone faces the same predicament as Japan.
CX Daily: Chinese Shippers’ Diverging Fortunes
- Shipping / In Depth: Chinese shippers’ diverging fortunes
Macao / Macao takes aim at currency exchange services for gamblers
Personnel / Securities watchdog official named head of Shenzhen Exchange
Indonesia Economics: Even with Headline Stability, Watch for More Policy Uncertainty
- Indonesia’s 2Q24 GDP continues the pattern of recent years of remarkably stable growth, but other data paint a more mixed picture when it comes to underlying demand.
- Changes in demand conditions may tilt the growth-inflation tradeoffs in favour of earlier rate cuts by Bank Indonesia, but pressures on the rupiah may limit its scope for action.
- Recent signs of mixed messaging and flip-flops in areas of fiscal policy, trade policy, and the new capital are signs that decision-making is being compromised by politicking
[IO Weekly 2024/32] Chinese Economic Sentiment Sours, Driving Iron Ore Lower; Option Activity Surges
- Iron Ore Price Decline: Iron ore prices dropped 1.7% in Week 32, driven by reduced steel output and fading demand. Stimulus-driven rally failed to sustain.
- Options Market Trends: Weekly options volume surged, with put volume increasing 106%, pushing the put/call ratio to 1.33, indicating bearish sentiment.
- Implied Volatility Shifts: Implied volatility (IV) surged midweek, particularly for September contracts, reflecting increased market uncertainty; options skew narrowed to just 0.3% suggesting more expensive calls.
Fundamental Changes Reflected from Recent Market Turbulence
- The recent market turbulence is partially due to a reduction in risky positions. The US economy is also slowing, while Eurozone data shows the recovery is not gaining momentum.
- China data points to a H2 slowdown. This will be a bumpier environment in H2 2024.
- We see scope for a further correction of the S&P500 to 5000, with USDJPY down to 140. Fed easing likely starts in September, supporting U.S. equities at lower levels.
Taiwan: Rates to Buck Global Loosening as Growth Stays Robust and Inflation Too High
- We expect a 12.5bp hike in the policy rate in Sep’24, as CPI inflation (2.52%YoY in Jul’24) remains well above the 2% target amid CBC concerns about overheated property markets.
- Real GDP grew 5.1%YoY in Q2CY24, following 6.6%YoY growth in Q1 (both faster than mainland China). Exports grew 10%YoY in Jan-Jul’24, and export orders growth is at a 2-year high.
- The market’s trailing P/E ratio (23.56x) is well above its 20-year mean (19.84x). But we recommend a mild Overweight in Taiwan equities, with a focus on the largest tech stocks.
UK Services CPI Realigns With Trend
- UK inflation increased in July on household energy utility price base effects, but unusual downside news in services prices limited the move to 2.2% and 3.6% on the CPI and RPI.
- The BoE erroneously extrapolated recent services strength, so a return to the downward trend would widen the gap in the coming months, but its predictive power is poor.
- Slowing trends can aid the MPC to cut again in November but further headline rises and excessive wage pressures should encourage at least a longer pause afterwards.
New Zealand Policy Rate 5.25% (consensus 5.5%) in Aug-24
- The RBNZ unexpectedly reduced the OCR by 25 basis points to 5.25%, citing weakening domestic economic activity and a decline in inflationary pressures, contrasting with the economic consensus of no change.
- The decision reflects a balance between maintaining restrictive monetary policy to ensure inflation remains anchored and responding to broader global trends of easing inflation and subdued economic growth.
- Future interest rate decisions will be influenced by the pace at which domestic inflation pressures dissipate, the stability of inflation expectations, and the evolving global economic conditions.
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