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Summary
ƒ Asia’s exports should rise by 10-15% YoY for 2010, with a bias to the upper end of that
range. ISM new orders for October-November were substantially stronger (58.9 and 56.6)
than those for July-September 2010 (when they subsided to the 51-53 range). As an excellent
six-month leading indicator of US demand for Asia exports, ISM new orders suggest to us that
Asia’s exports to the US for April-May 2011 will rebound to 11-15% YoY growth (ie, the lower
end of the monthly growth rates for 2010) after a brief lull to high-single-digit year-on-year
growth rates in 1Q11. The new orders component of the global Purchasing Managers’ Index
(PMI) also rose to a four-month high in November, suggesting that the global manufacturing
sector too should improve by 2Q11. The global PMI is usually mirrored in the OECD
composite leading indicator (CLI), and the next reading of this (to be released next week) is
likely to show a month-on-month gain after small monthly declines since May 2010. The yearon-year change in the OECD CLI is a good six-month leading indicator of overall Asian export
growth, and we think it is now approaching a growth trough. With intra-emerging-market (EM)
demand also likely to stay robust, we are more confident about our forecast for 10-15% YoY
growth for Asia’s exports in 2011, with a bias now toward the higher end of that range.
ƒ
Scant inflation justifies the persistence of ultra-low policy rates. The ISM employment
sub-indices suggest that US manufacturing employment has been rising since the start of
2010, while non-manufacturing employment has risen for the past three months. Yet, the US
unemployment rate rose to 9.8% in November, reflecting the structural decline in net
employment in the labour-intensive construction sector (similar to the experience in Asia’s
post-1998-crisis economies in the 1998-05 period). The slack in the labour market contributes
to the 53-year-low for US core-CPI inflation. Even if the Republican right succeeds in obliging
the Fed to abandon its dual mandate (and focus only on inflation), we think the inflation
readings will continue to justify a highly accommodative monetary stance throughout 2011, in
turn boosting US economic prospects.
ƒ Asian NEERs have room to rise. In light of improving export prospects, we think Asian
currencies will resume trend appreciation, rising by 7% against the US dollar and 10% versus
the Euro by end-2011. We note that the NEER (or trade-weighted index) of the Renminbi,
Rupee, Won and NT dollar were all weaker in November than in mid-2010, and substantially
weaker than in August 2008 (before the global downturn). We think they all have room to rise.
Modest growth for 2011 looks more secure
The evidence of the past two months’ data (and leading indicators) suggests to us
that the US economy has settled onto a modest growth path, after the mid-summer
lull in activity – which caused a short-lived scare regarding the durability of the
recovery. We did not join the chorus of ‘double-dip recession’ forecasts, primarily
because we were confident that Bernanke’s Fed would eventually abandon its mild
policy error (of the April-July 2010 period, during which the US monetary base
shrank as the Fed redeemed its stock of mortgage-backed securities [MBS]). The
move to ‘quantity stability’ after the 10 August Federal Open Market Committee
(FOMC) meeting, and then quantitative easing (QE2) since 3 November have, we
believe, played a crucial role in setting the US economy back onto an even keel.
The labour market, however, continues to be one arena of persistent weakness for
the US. Even on this front, the ISM survey shows that net employment in
manufacturing has been rising since the start of 2010 – and the past three months
have seen the employment sub-index of the ISM’s non-manufacturing survey also
move decisively above 50, signalling a rise in non-manufacturing employment too
(previous chart). The problem for the US labour market is that the labour-intensive
construction sector has not yet found a bottom – and net employment in
construction is unlikely to return to anything close to its 1999-07 levels in the next
decade. This is akin to the situation that ASEAN and Korea faced in the aftermath
of the 1997-98 crisis, with construction activity deeply depressed for the
subsequent seven-to-eight years (because of excess capacity in residential and
commercial property). This ‘structural’ element of the US employment situation is
a key contributor to the persistently high unemployment rate – which actually rose
further to 9.8% for October.
The US Fed has come under increasing attack from the right of the US political
spectrum, and we expect these attacks to worsen if Rep. Ron Paul (who advocates
abolishing the Fed and a return to the gold standard) is elected head of the US
House Committee on Financial Services (or its subcommittee on Monetary Policy).
It appears that the Republican House leadership is attempting to keep Paul from
taking the committee chairmanship (although he is the senior-most member). The
Tea Party movement appears keen to dilute the Fed’s ‘dual mandate’ (of focusing
on both inflation and the unemployment rate) which the FOMC used (at its
September meeting) to justify the gradual move toward QE2. Although this still
appears to be a minority view within the Republican congressional delegation, the
FOMC’s future actions will be slightly constrained by the new political
environment. We note, however, that even a focus on a pure inflation target (to the
exclusion of any consideration of the unemployment rate) would suggest the need
to persist with a highly accommodative monetary policy. Core CPI inflation fell to
0.8% YoY for October (its lowest point since records began 53 years ago). And the
core PCE deflator (the wider measure of consumer inflation to which the FOMC
pays attention) also continues to grind lower (following chart). Even if its mandate
were altered to focus only on inflation, we believe the FOMC would be able to
justify the continuance of a highly-accommodative monetary stance through all of
2011, and that stance should ensure a gradual, steady improvement in US economic
performance through the course of next year.
ISM manufacturing new orders, which lead US imports from Asia by six months,
moderated slightly to 56.6 in November (from 58.9 in October), suggesting that
Asian exports to the US will expand by 10-12% YoY in May 2011, marginally
slower than the pace indicated for April 2011 (following chart). The November
reading was substantially stronger than those of the July-September 2010 period, so
the 1Q11 lull in export growth (to about 8% YoY in early 2011) should prove
short-lived. The headline PMI (the composite of the ISM readings for new orders,
production, employment, etc.) also eased slightly to 56.6 in November (from 56.9
in October), but the PMI readings for October-November were consistent with
nearly 5% annualised real GDP growth – suggesting a clear acceleration in the US
economy in 4Q10.
The OECD CLI is also a good six-month leading indicator of overall Asian export
growth. As the following chart shows, the OECD CLI has been decelerating in the
past half year (from its fastest pace of expansion in 20 years over the previous halfyear). The actual level (rather than year-on-year growth) of the OECD CLI has
flattened in the past couple of months (after edging slightly lower between June
and August from the May peak), suggesting a levelling-off in the moderation of the
leading indicators. November PMIs around the world (China, India, Korea,
Germany, the UK) were all at multi-month highs and the global PMI (and new
orders) reached a four-month high, suggesting that the global manufacturing sector
is likely to sustain reasonable expansion in 2Q11, after a growth trough in 1Q11.
We retain our forecast of overall export growth for Asia of 10-15% YoY for 2011,
aided by the strength of intra-EM demand. If leading indicators of the US and
OECD demand sustain the past two months’ strength, we believe overall export
growth for Asia would be closer to 15% YoY next year.
With the prospects for Asia’s export performance in 2011 looking substantially
better now than two months ago, we think Asian currencies have more room to
appreciate. A careful look at the NEERs (or trade-weighted indices) of various
Asian currencies (on the next two charts) shows that: a) the Renminbi did
appreciate slightly more than 1% MoM in November 2010 (as it held stable against
the US dollar, which rallied against most currencies last month), but had
depreciated from its mid-2010 level and was 1.6% weaker than in August 2008
(before the global crisis), b) the Rupee’s NEER was unchanged month-on-month in
November, but was also weaker than in mid-2010 and in August 2008, and c) the
Won and NT dollar were stronger in November 2010 than in mid-2010, but both
were weaker than in August 2008 (the Won substantially so, still down about 16%
on its pre-global-crisis level)
By contrast, the ASEAN currencies have (with the exception of the Indonesian
Rupiah and Philippine Peso) surpassed their pre-August 2008 levels. Thus, d) the
NEER of the Malaysian Ringgit and Thai Baht were both stronger than in mid-
2010 and in August 2008, and e) the Singapore dollar’s NEER (as befits its status
as the only target of monetary policy, and the key inflation-fighting tool) had
continued its trend appreciation, and was stronger than its mid-2010 and August
2008 levels. From the perspective of managing capital inflows in the period of QE2
(and its attendant surge of liquidity), these three ASEAN central banks have, in our
view, done the best job of dampening the impact of capital inflows on domestic
liquidity (by letting local currencies appreciate, and thereby dampen the localcurrency value of their stock of foreign reserves). Going forward, as the pressure of
QE in all the G3 central banks increases, we expect the central banks of China,
Korea and Taiwan to also be obliged to follow the ASEAN example and let
currencies appreciate. We retain our view that the Renminbi, Won, NT dollar,
Ringgit, Baht, Rupiah, Singapore dollar and Peso will all appreciate by about 7%
by the end of 2011 against the US dollar and by about 10% against the Euro.
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