Brief Macro: Trade Talks/Huawei/ MSCI/Consumption/Zombies and more

In this briefing:

1. Trade Talks/Huawei/ MSCI/Consumption/Zombies
2. Capital Flows Return To Asia and India
3. As Trump Turns: Tottering Towards Dem Trap on Wall; Posturing on China So Talks Look Tough
4. The RBI Duly Caves in to Reality; Tame Inflation Implies a Further Rate Cut in Six Weeks
5. Preview: UK Disinflation Regulated for Jan-19

1. Trade Talks/Huawei/ MSCI/Consumption/Zombies

China News That Matters

• War-averting trade talks switch to Beijing 
• Huawei: install at your own risk
• Beijing bears down on index giant 
• Cheap tellies ‘n posh make-up
• Take that, foul army of the dead 

2. Capital Flows Return To Asia and India

• Latest January ‘flash’ data show cross-border capital returning to Asia
• Asian EM and India favoured
• Reinforces similar evidence in December and helps reverse big outflows a year ago
• Adds support to our view that Asia is leading the Global cycle higher

3. As Trump Turns: Tottering Towards Dem Trap on Wall; Posturing on China So Talks Look Tough

• Trump won’t walk away from the Wall – but Pelosi need not budge on funding.  If Trump invokes emergency powers, Democrats would rejoice.
• On Venezuela, the anti‑Cuba lobby in swing‑state Florida has transformed Trump from isolationist to hawk.

• Posturing for domestic effect, Trump wants China talks to look tough – lest he appear to cave too readily.

4. The RBI Duly Caves in to Reality; Tame Inflation Implies a Further Rate Cut in Six Weeks

The RBI (Reserve Bank of India) cut its policy rate by 25bp, with the MPC (monetary policy committee) voting 4-2 in favour of the move. It also altered its monetary stance to “neutral” from “calibrated tightening”. We had said at the time of the RBI’s rate hike last June that it was making a major policy error ( RBI Raises Rates, but Will Likely Look Foolish when Inflation Moderates) because inflation was likely to completely bely the official forecast and move down rather than up. That has duly happened, with CPI inflation at 2.19% YoY in December 2018 (versus the RBI’s June 2018 forecast of “4.7% with risks tilted to the upside”). WPI inflation (not the RBI’s main target) has also eased to 3.8% YoY in December 2018. 

India’s real repo rate of +4.3% was among the highest in the world before this rate cut — and the new +4% real repo rate still remains exceptionally high. Although food prices are likely to decline less rapidly in the current quarter, headline CPI inflation is likely to edge up only slightly to 2.5-3% YoY in January-March 2019. This will allow the RBI to cut the policy rate further to 6% at its next meeting — still leaving the real repo rate above +3%.

The rational decline in nominal policy rates should provide a significant medium-term fillip to growth, allowing real GDP to grow more than 8% YoY in FY2019/20 and more in subsequent years as further structural reforms occur under a rejuvenated Modi government in its second term. After its initial negative reaction, we expect the stock market to also welcome the easier monetary conditions. We recommend staying Overweight the India equity and bond markets, especially after recent sell-offs (i.e., Buy into this weakness).  

5. Preview: UK Disinflation Regulated for Jan-19

• The imposition of a household energy price cap in the UK had a significant disinflationary effect in Jan-19 and lowered my CPI and RPI inflation forecasts to 1.9% and 2.5%.
• These outcomes would be below the consensus again, although that is now the norm amid a heavy bias to surprises, especially relative to the RPI consensus.