Daily Macro: Philippines: Another CPI Downside Surprise in December and more

In this briefing:

1. Philippines: Another CPI Downside Surprise in December
2. China Consumables in a Sluggish Economy
3. RRR Rate Cut in China
4. FX Reserves in China
5. UK Wrap: Politically Fragmented Outlook

1. Philippines: Another CPI Downside Surprise in December

• Another CPI downside surprise largely due to hefty disinflation in CPI food and transport coupled with easing core inflation. Seasonally adjusted headline CPI printed another monthly drop (-0.4%MoM SA). The 2018 average inflation rate was 5.2%. 

• Assuming oil prices stay low and prevailing supply conditions persist, inflation can fade to less than 4% starting in March, based on our latest extrapolation. Average inflation in 2019 can settle at 3%.

• The updated inflation trajectory, benign oil price conditions and supply side effects of upcoming liberalization of rice imports, would sustain BSP’s neutral rate stance this year and terminate its rate hiking cycle.
• It’s still premature to talk about policy rate easing this year considering the limited policy space for flexibility as we face the risk of large macro imbalances that may require positive real rates and weaker PHP. 

• Enjoy the local market rallies following CPI’s downside surprise. We prefer to take profits on risk asset market rallies this early in the new year. 

2. China Consumables in a Sluggish Economy

The PBOC’s desire to loosen up China’s economy is relying on consumers to keep spending. However, as seen in the data below, consumers just are not spending. From cars, to cameras and retail, consumers are increasingly avoiding big ticket items, as China’s consumers look for breathing space.

3. RRR Rate Cut in China

The big news in Chinese finance was the PBOC announcing Friday that it was cutting the RRR rate. Rather than what you can read in the press, we want to focus on a variety of factors which may not be as widely recognized.

4. FX Reserves in China

FX reserves are up by about 10 billion dollars, which against a back drop of the size of FX and the Chinese economy is basically no change. They have been oddly flat over the past two years. Yet, the noise is really just that, the FX increase is so small that we believe it is a non-starter.

5. UK Wrap: Politically Fragmented Outlook

• Brexit: Agreement with the EU was concluded before reaching the required reassurances for parliament. A soft Brexit remains most likely, before breaking harder, but the politics is fragmenting the outlook.
• Economy: The post-referendum growth trend pace has re-established at 0.15% m-o-m, which appears to be above-potential. Inflation should temporarily slow below target despite domestic pressure building.
• Monetary policy: The BoE delivered its second rate hike in August to 0.75%. Bullish economic trends mean I expect the next hike in May-19, assuming a smooth transition becomes assured soon.