India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Economics
Greater China, Korea
• CN: M2 still managed to advance 19.7% in 2010 despite persistent monetary
tightening on all fronts (average M2 growth between 2000 and 2008 is 17%). The
growth of money is also clearly much faster than the economy. The differential
between M2 and nominal GDP last year was about 700bps, way higher than the
average of 100bps between 2000 and 2008. The surge of money supply is consistent
with the big jump of foreign reserves to USD2.85trn from USD2.39trn in 2009. Even
after discounting sterilization done by the PBOC, the expansionary impact of
surging foreign reserves on domestic monetary supply will subsequently ramp up
inflationary pressure. This in turn will dwarf borrowing costs in real terms over time.
It is not a surprise to see new outstanding loans topped CNY7.95trn, exceeding the
official loan quota target of CNY7.5trn last year in spite of numerous administrative
controls at work.
Against such backdrops, inflation bias will remain strong in the near term.
Administrative measures may help to restrain upward price pressure somewhat in
the short term but it cannot deal with the root of the problems: (1) real interest rate
is too low; (2) the pace of exchange rate appreciation is too slow. Should inflation
and other monetary parameters continue to charge ahead in 1Q11, the magnitude
of rate hike and exchange rate appreciation may surprise the market on the upside.
Elsewhere, the liberalization of the capital account, particularly with respect to
outbound direct/portfolio investment, should speed up to complement with a
stronger exchange rate ahead.
Southeast Asia, India
• ID: We are lifting the annual inflation forecast to 7.0% for 2011, significantly up
from 6.5%. Food prices inflation has been rising faster than expected due to the
continuation of rainy weather which seriously disrupted local agricultural supply. Oil
price inflation will start to pick up soon after the government cuts fuel subsidies in
March (for private car users in the Greater Jakarta area). The persistent strength in
domestic demand will allow the passthrough of food and oil costs. CPI inflation is
expected to stay higher than 7% YoY throughout the first half of this year, peaking
at 7.5% in 2Q, and ending the year at 6-6.5%. Core inflation is also expected to rise
pronouncedly to 5% from 2Q onwards and reach 5.5-6% by the year-end.
The central bank will face mounting pressures to hike rates and tame inflation in the
coming months. Thus far, Bank Indonesia has not given clear signals that they will
hike rates soon, holding the view that food inflation is mainly caused by supply
shocks and should be addressed by supply side measures. It seems that BI will hike
rates only after seeing headline inflation stays above target for an extended period
and/or core inflation rises significantly towards 5%. Based on our updated inflation
forecast, we expect BI to hike rates from March (vs. previous forecast of February),
while our year-end rate target is left unchanged at 8.0%.
Despite higher inflation and higher interest rates, the outlook for economic growth
is positive. The rise in food and oil prices is not completely negative. The costs of
basic necessities will be elevated, while household incomes will continue to increase
on the other hand - the agriculture sector alone accounts for 40% of the country’s
total employment. Thus far there are no evidences showing a sharp slowdown in
private consumer spending. Consumer confidence stayed firmly in the expansionary
territory, at 109.3 points as of Dec10. The growth in motor vehicle sales and
motorcycle sales has fallen from the peak seen in 2Q10, but remaining fairly close to
their long-term averages.
The expected BI rate hikes will unlikely impose a severe constraint on real economic
growth. The economy has not entered an overheating stage and the hard landing
risks are low, judging from the facts that core inflation levels are not yet
threatening, the current account remains in stable surplus, and bank credit and
money supply growth has not deviated from nominal GDP growth.
Moreover, exports and investment have been faring better than expected thanks to
the commodity upcycle. Custom exports have reaccelerated sharply in 4Q10.
Investment indicators including capital goods imports and banks’ working capital
loans also recorded strong gains in 4Q10. We have adjusted real GDP growth
forecast to 6.0% for 2011 (5.8% previously). The upward revisions mainly come
from real exports (from 8.7% to 9.5%) and investment (from 8.7% to 9.2%), while
the forecast for private consumption is kept unchanged (4.9%).
• IN: Industrial production for November is on tap today. Production
numbers, especially in year-on-year terms, have been very volatile in this
recovery. This is partly a reflection of the various uncertainties
that threaten the recovery now and then (which is natural
given that this is a recovery from the worst global recession
since the 1930s) and partly due to the uneven base from last
year. Whatever be the exact reason in a
given month, we have seen that industrial production growth (in year-on-year
terms) has swung in a wide 4%-15% range in the past six months. Our reading is
that production (level) has now normalized with the sharp rise in October’s
production. We therefore expect that gain to be preserved in November and
expect a close-to-trend sequential rise in production of over 7% (MoM, saar) in
November. In year-on-year terms, this works to 8.2% (YoY) industrial production
growth, much higher than consensus forecast of 6.5% (YoY). With this, we think
growth remains on track to meet our 8.8% forecast for 2010/11 (Apr-Mar). However,
as the number remains a wildcard due to sheer month-to-month volatility, we think
the central bank would not put too much emphasis on the data, especially if it
comes in weaker than expected. On the other hand, if the number comes in
stronger than expected, it would not only seal a 25bps hike at the policy meeting
later this month (which is already all but certain given the spike in inflation) but
also bring in the prospect of a 50bps hike (odds of which we think still remain low).
G3
• US: In a slow week for data, jobless claims are on tap tomorrow. Claims have
improved markedly over the past 8 weeks and highlight the improvement seen in
all other labor market data save, of course, for the nonfarm payrolls, which
continue to disappoint. Weekly claims have fallen by 50k over the past two months
(on a smoothed 4 week moving avg basis) to 411k as of Dec31, breaking through,
at long last, the 450k barrier that blocked them for the previous nine months (chart
below). Historically, the ‘beta’ between weekly claims and nonfarm payrolls is 2.5,
which means a 50k drop translates into 125k improvement in monthly payrolls. If
claims continue on the path they have traveled for the past two months (which is
nearly identical to the path traveled between Apr09 and Apr10) payrolls should be
up above 300k in another month or two at most. (Job growth of 300k per is already
being reported by the ADP and household surveys of employment).
Fixed Income
• KR: The BOK is likely to resume interest rate tightening tomorrow to respond to
rising inflationary pressures. We expect a rate hike of 25bps this week, which would
take the policy rate to 2.75% from 2.5% currently. Managing inflation is becoming
top priority for policy makers, as annual CPI inflation remains above the mid point
of the BOK’s target range of 2%-4%. Annual CPI inflation rose to 3.5% YoY last
month from 3.3% in November and based on the current trend will likely rise to
4% in 2Q11. With monetary policy poised to focus on price stability this year, rate
hike risks remain high and will be key to the bond market outlook this year. We
should expect KTB yields to rise further. Yields will be pushed higher by rate hikes
and higher deposit rates. Even if inflows of foreign capital remain strong in the
coming months and demand for KTBs out of the banking sector is strong because
of rapid money stock growth, KTB yields are more likely to rise than fall. The left
chart below shows the historical relationship between the 3Y KTB yield and the
average deposit rate, which suggests that 3Y KTB yields will rise if deposit rates are
pushed higher by rate hikes. That should mean that the impact of inflows and
money stock growth will likely be limited to flattening pressure at the front end of
the curve. With 3Y yields not much higher than deposit rates currently, banks will
likely move bond positions further out the curve and the current flattening trend
in the 3Y/5Y curve will continue.
Looking Back
• US mkts: US stocks rose overnight as concerns over the debt problems in Europe
eased. The Dow Jones Industrial Average rose 0.3% to 11671.88 and the Nasdaq
closed 0.33% higher at 2716.83. Treasury yields rose 2bps to 0.59% in the 2Y sector
and 5bps to 3.34% in the 10Y sector.
No comments:
Post a Comment