Brief Macro: UK Inflation: Devilish Detail Extending Trends and more

In this briefing:

1. UK Inflation: Devilish Detail Extending Trends
2. Global Credit Cycle: Full-Blown Repeat of 2008 Crisis Unlikely…Contrary to Doomsayers
3. RBI Credibility at Stake
4. Philippines: El Niño’s Comeback – How Bad?
5. FLASH: UK Labour Market Melt-Up into 2019

1. UK Inflation: Devilish Detail Extending Trends

• UK inflation was marginally stronger on the CPI and weaker on the PPI in Feb-19. Partially offsetting surprises lift my March forecast lightly before lowering it.
• Airfares and household energy prices are still set to significantly raise inflation to April before the latter unwinds enough in October to fall below target again.
• Annual updates to weightings extend trend changes in average rates and seasonality. The latter is likely to remain a source of surprise, while some market benchmarks might move almost 20bp further as they keep converging to reality.

2. 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.

3. 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

4. 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.

5. 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.