Brief Macro: What Next in the Inflation / Deflation Debate and What Does It Mean for Asset Prices? and more

In this briefing:

1. What Next in the Inflation / Deflation Debate and What Does It Mean for Asset Prices?
2. UK: IP Indicators Boom Above Peers in Mar-19
3. Buy or Sell/Europe/Trade War/Huawei/Financial Services
4. Bull Or Bear? Latest Global Liquidity Readings
5. 18pt Lead Mitigates Prabowo-Related Risk / Islamic Parties Declining / PRC Textile Plan / 4th Debate

1. What Next in the Inflation / Deflation Debate and What Does It Mean for Asset Prices?

Despite some signs of stabilization in China’s factory gauges the primary trend is still weakness and it might be rash for investors to read too much into the recent data given the apparent weakness in the Eurozone and the moderation form a high level of growth in the United States.  Quantitative tightening is on hold in the United States but a sharp “U-turn” to easing has not happened yet and is politically embarrassing. As inflation falls real rates are rising. Housing markets are showing signs of price weakness. Investors need to watch for signs of credit quality decay that could be an indicator of the next period of severe financial distress. 

2. UK: IP Indicators Boom Above Peers in Mar-19

• The UK’s manufacturing PMI surged to 55.1 in Mar-19, contrary to the consensus and the euro area’s ongoing collapse. Inventory accumulation ahead of Brexit is exaggerating the UK’s strength, but full payback may not come in April.
• Energy output also rebounded in March while robust extraction of oil and gas in February offsets some of the earlier energy weakness. My 1Q19 GDP growth forecast remains brisker than the BoE and Consensus at 0.4% q-o-q.

3. Buy or Sell/Europe/Trade War/Huawei/Financial Services

China News That Matters

• Ride that A-Share wave. Until you can’t
• Europe looks East
• Change, China! You’ll thank us for it
• We’ll buy your gear – but please try and behave
• Scots take aim at Chinese pension insurance

4. Bull Or Bear? Latest Global Liquidity Readings

• Global Liquidity bottoming out, but Central Banks not yet easing
• US Fed only withdrew $30bn in Q1, versus $350 bn in Q4
• PBoC still tightening through OMOs
• ECB  on ‘pause’
• QE4 is coming in 2019, but no evidence it has started yet

5. 18pt Lead Mitigates Prabowo-Related Risk / Islamic Parties Declining / PRC Textile Plan / 4th Debate

Two new and credible polls show Widodo leading by margins of 18-19 percentage points over Prabowo.  This mitigates — but does not entirely eliminate — risks surrounding the 17 April election outlook.  Polls show PDI-P and Gerindra gaining at the expense of Islamic parties.  The 4th debate on 30 March could help Prabowo draw slightly closer.  The planned US$400 million relocation of a textile plant from China to Central Java bodes well, but whether central government policies are supportive remains to be seen.  Two SOEs are under corruption scrutiny: Krakatau Steel Persero Tbk (KRAS IJ) and Pupuk Indonesia.  A reasonable MRT tariff is in place.

Politics: Coordinating Security Minister Wiranto threatened to invoke the Terrorism Law on those who advocate abstaining on election day.  He may believe that high turnout will benefit President Joko Widodo – but the draconian threat will harm Widodo’s image more than it helps (Page 2).  The next presidential debate on 30 March will likely feature discussion of Widodo’s proposal to place active military officers in civilian bureaucratic posts (Page 2).  Vice‑presidential nominee Sandiaga Uno promised fisheries operators that he and Prabowo Subianto would overturn a ban on dragnet trawling (p. 4).  Constitutional Court justices will prioritize the resolution of legislative election disputes (p. 5). 

Surveys: With less than three weeks remaining until the 17 April election day, two more new polls show the lead for President Joko Widodo remains intact.  A poll by the Center for Strategic and International Studies (CSIS) took place from 15-22 March; it shows Widodo ahead by 18 percentage points, with 15 percent undecided.  Similarly, a poll by Charta Politik showed Widodo leading by 19 points; it also implies that Islamic and Islamic‑oriented parties will shrink by a third on aggregate.  Both polls indicate that the reform‑minded Solidarity Party (PSI) is unlikely to pass the four‑percent threshold required to occupy parliamentary seats; incumbent parties at risk of falling short are Hanura, the National Mandate Party (Pan) and the United Development Party (PPP) (p. 6). 

Justice: Investigators from the Anti-Corruption Commission (KPK) made arrests in cases involving the state enterprises PT Krakatau Steel Tbk and PT Pupuk (p. 10). 

Jakarta: Policymakers finally decided upon a reasonable tariff for the new Mass Rapid Transit (MRT) – Rp10,000 per 10 kilometers, with a maximum fare of Rp14,000 (p. 11).

Economics: Plans to relocate a sizeable Chinese textile plant in Central Java send a positive signal about manufacturing – but whether central‑government policies will be adequately supportive remains to be seen (p. 12).

Outlook: Plentiful poll data shows that Widodo has a comfortable margin of 55‑60 percent, with few factors likely to alter circumstances in the final three weeks.  But his opponent is brazen and risks therefore exist.  Widodo winning by only a very narrow margin is a scenario with a low probability – but a high potential impact.  Prabowo has a penchant for protesting angrily, hard‑line supporters can inundate Jakarta and the Constitutional Court has a protracted schedule for resolving disputes (its deadline is 8 August) (p. 14).