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Southeast Asia, India
• SG: Industrial production for December due today is expected to register 20.3% YoY,
down from 39.8% in the previous month. While a modest pullback in pharmaceutical
output cannot be discounted, a softer production growth from the electronics segment
could be the key factor for the moderation. Apart from seasonal effect where producers
typically front-load their Christmas season output to October, global electronics inventory
restocking is also coming to an end. This is evident in the recent SEMI book-to-bill
ratio as well as the global semiconductor sales numbers, which both are moderating
from the peak in early 2010. Concomitantly, the PMI numbers are also showing some
signs of weakening in manufacturing growth. The broad manufacturing PMI index
though continues to show that the sector remains in expansion mode, the pace of
growth is moderating. Moreover, the PMI sub-indices show that new orders and production
are declining while inventory and stock levels are building up, suggesting that the
manufacturing sector could be in for a soft patch ahead. Couple that with the Chinese
New Year effect in the next two months, in which plants in China will typically go into
a lull period during the festive season, the headline production index will surely
experience significant volatility.
• IN: The Reserve Bank of India (RBI) yesterday raised the overnight repo and reverse
repo rates by 25bps each to 6.50% and 5.50% in line with expectations. The RBI finetuned its GDP forecast for 2010/11 from 8.5% to “8.5% with an upside bias” (DBS
forecast: 8.8%). The WPI inflation for Mar 2011 was raised sharply from 5.5% to 7%.
This is higher than DBS forecast for inflation to ease to 6.5% (YoY) by March but given
vagaries in weather and food prices, the forecasts all have to be interpreted more
generally.
The tone of the statement and the measured the policy hike sit well with our expectation
that the central bank will keep its feet on the rate hike pedal for a while longer but
not slam the monetary brakes (see “IN: Food inflation demand-driven”, 24 Jan 2011
for more). On inflation, the RBI noted that “several upside risks are visible” and that
“there is some evidence of rising demand side pressures”. Importantly, with regards to
further policy action, the RBI assessed that “the need is to persist with measures to
contain inflation and anchor inflation expectations” (Table). The central bank also
expressed serious concerns about risks to stability ahead if commodity prices continue
to rise fast – the current account and fiscal deficits would widen even as inflation
pressures mount.
On the prevalent tight liquidity conditions, the statement suggests the RBI expects
banks to address this with faster deposit rate hikes. As such, it is not possible for the
central bank to ease liquidity conditions in a durable fashion (such as by lowering the
cash reserve ratio) and not at the same time send conflicting signals about monetary
policy and inflation. This means tight liquidity conditions, which is partly structural in
nature, will also do some of the work in reining in credit and inflation. All considered,
we are comfortable with our view that the repo and reverse repo rates will be hiked by
another 25bps hike at the next meeting in March and then by 25bps in each quarter
thereafter until Dec-11. This should take the repo and reverse rates to 7.50% and
6.50% by Dec-11.3
Daily Breakfast Spread, 26 Jan 2011
Fixed Income
• MY: Bank Negara is widely expected to leave its policy rate unchanged tomorrow, but
with the economic growth outlook remaining positive and annual inflation having
accelerated to 2.2% in December, further monetary policy tightening this year cannot
be ruled out. Market rates have already risen to reflect a greater probability of rate
hikes this year. Klibor futures now reflect a 56bps increase in 3M rates from 3.01%
currently to 3.57% by December. That means a return of short-term interest rates to
pre-crisis levels of around 3.5% this year is now priced into the swap curve. As such,
upward pressure on swap rates will likely lessen. The 1Y swap rate is likely to rise to
3.5% before end-1Q11 and the 3Y rate will likely rise to 4%. We continue to think that
with swap spreads having normalized, further increases in swap rates on the back of
rate hike expectations also mean upward pressure for MGS yields. Swaps are still likely
to underperform bonds, but the rise in bond yields is unlikely to trail the increase in
swap rates by much. Ten-year MGS yields have returned to their 10Y average level of
4.16% and are more likely to trade above it than below it in the coming months.
Greater China, Korea
• CN: The monetary side of the Chinese economy tells an interesting story about inflation.
The growth differential between M2 and nominal GDP was widened to a historical
high of 1900bps in 2009 and fell back to 300bps in 2010. From this perspective, the
growth speed of M2 relative to nominal GDP has normalized substantially because the
10-year average growth gap is about 300bps. (The average gap falls to 1.1 if we
exclude outlier data points in 2009).
However, the ratio of M2 to nominal GDP was standing at 1.82, which is still higher
than 1.78 in 2009 despite six hikes on the reserve requirement ratio. The latest figure is
about 13.8% higher than the 10-year mean of 1.6.
If the central bank manages to keep the money supply growing faster than economic
growth, say within a range of 100bps to 300bps, inflation shouldn’t be much of a
concern in the longer run. Inflation will not run out of control if monetary management
is prudent. The key message here is, however, that the absolute quantity of monetary
stock is now permanently higher than before achieved in a very short period of time
driven by excess credit creation. Thus chances are slim that the ratio of M2 to nominal
GDP will easily be reversed. That also implies China’s inflation rate will be permanently
higher than before. The days of 2% are likely to be gone for good even if the headline
inflation subsequently starts easing in 2H11. That in turn calls for higher interest rates
and a stronger exchange rate ahead.
Interpretations of China’s medium term inflation outlook are crucial because subsequent
policy responses to the re-rating of inflation will affect the rest of the region.
• KR: The preliminary estimate for 4Q GDP was just announced this morning. On the
seasonally-adjusted annualized basis, Korea’s real GDP growth slowed to 2.2% QoQ
saar in 4Q10 from 3.0% in 3Q10. A significant contraction in investment was the main
drag as we have expected. Gross fixed capital formation declined -11.6% and reversed
the 12.9% gains in the preceding quarter, with construction investment and facilities investment
respectively falling -16.8% and -6.4%. By contrast, exports of goods and services continued to grow
a strong 9.9%, up from 6.9% in 3Q. Growth in private consumption expenditures decelerated
to 1.2% after jumping 5.1% in 3Q, but its average growth in 2H10 remained stable as
compared to 1H10.
The full-year GDP growth for 2010 averaged at 6.1%, close to our forecast of
6.2%. For 2011 we are maintaining our GDP forecast unchanged at 3.9%. We think that the growth weakness
in 4Q10 was caused by producers’ excessive worries about global slowdown, in combination
with the lagging effects of the authorities’ tightening measures targeted at the property
sector. As final demand from exports remains strong and the property market has
already started to revive from end-2010 thanks to eased regulations, we expect a
rebound in investment and overall economic growth going forward. The degree of
growth rebound in the year-beginning will have strong influence on the whole-year
GDP growth figures for 2011. Our current GDP forecast of 3.9% has pencilled in about
5% growth (QoQ saar) in 1Q11, followed by an average of 4% (on-trend growth)
during the next three quarters in 2Q-4Q11.
Fixed Income
• MY: Bank Negara is widely expected to leave its policy rate unchanged tomorrow, but
with the economic growth outlook remaining positive and annual inflation having
accelerated to 2.2% in December, further monetary policy tightening this year cannot
be ruled out. Market rates have already risen to reflect a greater probability of rate
hikes this year. Klibor futures now reflect a 56bps increase in 3M rates from 3.01%
currently to 3.57% by December. That means a return of short-term interest rates to
pre-crisis levels of around 3.5% this year is now priced into the swap curve. As such,
upward pressure on swap rates will likely lessen. The 1Y swap rate is likely to rise to
3.5% before end-1Q11 and the 3Y rate will likely rise to 4%. We continue to think that
with swap spreads having normalized, further increases in swap rates on the back of
rate hike expectations also mean upward pressure for MGS yields. Swaps are still likely
to underperform bonds, but the rise in bond yields is unlikely to trail the increase in
swap rates by much. Ten-year MGS yields have returned to their 10Y average level of
4.16% and are more likely to trade above it than below it in the coming months.
Looking Back
• US mkts: US stocks ended the overnight session flat ahead of tonight FOMC meeting.
The Dow Jones Industrial Average fell 0.03% to 11977.19 and the Nasdaq closed
0.06% higher at 2719.25. Treasury yields fell 4bps to 0.58% in the 2Y sector and 8bps
to 3.32% in the 10Y sector.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Southeast Asia, India
• SG: Industrial production for December due today is expected to register 20.3% YoY,
down from 39.8% in the previous month. While a modest pullback in pharmaceutical
output cannot be discounted, a softer production growth from the electronics segment
could be the key factor for the moderation. Apart from seasonal effect where producers
typically front-load their Christmas season output to October, global electronics inventory
restocking is also coming to an end. This is evident in the recent SEMI book-to-bill
ratio as well as the global semiconductor sales numbers, which both are moderating
from the peak in early 2010. Concomitantly, the PMI numbers are also showing some
signs of weakening in manufacturing growth. The broad manufacturing PMI index
though continues to show that the sector remains in expansion mode, the pace of
growth is moderating. Moreover, the PMI sub-indices show that new orders and production
are declining while inventory and stock levels are building up, suggesting that the
manufacturing sector could be in for a soft patch ahead. Couple that with the Chinese
New Year effect in the next two months, in which plants in China will typically go into
a lull period during the festive season, the headline production index will surely
experience significant volatility.
• IN: The Reserve Bank of India (RBI) yesterday raised the overnight repo and reverse
repo rates by 25bps each to 6.50% and 5.50% in line with expectations. The RBI finetuned its GDP forecast for 2010/11 from 8.5% to “8.5% with an upside bias” (DBS
forecast: 8.8%). The WPI inflation for Mar 2011 was raised sharply from 5.5% to 7%.
This is higher than DBS forecast for inflation to ease to 6.5% (YoY) by March but given
vagaries in weather and food prices, the forecasts all have to be interpreted more
generally.
The tone of the statement and the measured the policy hike sit well with our expectation
that the central bank will keep its feet on the rate hike pedal for a while longer but
not slam the monetary brakes (see “IN: Food inflation demand-driven”, 24 Jan 2011
for more). On inflation, the RBI noted that “several upside risks are visible” and that
“there is some evidence of rising demand side pressures”. Importantly, with regards to
further policy action, the RBI assessed that “the need is to persist with measures to
contain inflation and anchor inflation expectations” (Table). The central bank also
expressed serious concerns about risks to stability ahead if commodity prices continue
to rise fast – the current account and fiscal deficits would widen even as inflation
pressures mount.
On the prevalent tight liquidity conditions, the statement suggests the RBI expects
banks to address this with faster deposit rate hikes. As such, it is not possible for the
central bank to ease liquidity conditions in a durable fashion (such as by lowering the
cash reserve ratio) and not at the same time send conflicting signals about monetary
policy and inflation. This means tight liquidity conditions, which is partly structural in
nature, will also do some of the work in reining in credit and inflation. All considered,
we are comfortable with our view that the repo and reverse repo rates will be hiked by
another 25bps hike at the next meeting in March and then by 25bps in each quarter
thereafter until Dec-11. This should take the repo and reverse rates to 7.50% and
6.50% by Dec-11.3
Daily Breakfast Spread, 26 Jan 2011
Fixed Income
• MY: Bank Negara is widely expected to leave its policy rate unchanged tomorrow, but
with the economic growth outlook remaining positive and annual inflation having
accelerated to 2.2% in December, further monetary policy tightening this year cannot
be ruled out. Market rates have already risen to reflect a greater probability of rate
hikes this year. Klibor futures now reflect a 56bps increase in 3M rates from 3.01%
currently to 3.57% by December. That means a return of short-term interest rates to
pre-crisis levels of around 3.5% this year is now priced into the swap curve. As such,
upward pressure on swap rates will likely lessen. The 1Y swap rate is likely to rise to
3.5% before end-1Q11 and the 3Y rate will likely rise to 4%. We continue to think that
with swap spreads having normalized, further increases in swap rates on the back of
rate hike expectations also mean upward pressure for MGS yields. Swaps are still likely
to underperform bonds, but the rise in bond yields is unlikely to trail the increase in
swap rates by much. Ten-year MGS yields have returned to their 10Y average level of
4.16% and are more likely to trade above it than below it in the coming months.
Greater China, Korea
• CN: The monetary side of the Chinese economy tells an interesting story about inflation.
The growth differential between M2 and nominal GDP was widened to a historical
high of 1900bps in 2009 and fell back to 300bps in 2010. From this perspective, the
growth speed of M2 relative to nominal GDP has normalized substantially because the
10-year average growth gap is about 300bps. (The average gap falls to 1.1 if we
exclude outlier data points in 2009).
However, the ratio of M2 to nominal GDP was standing at 1.82, which is still higher
than 1.78 in 2009 despite six hikes on the reserve requirement ratio. The latest figure is
about 13.8% higher than the 10-year mean of 1.6.
If the central bank manages to keep the money supply growing faster than economic
growth, say within a range of 100bps to 300bps, inflation shouldn’t be much of a
concern in the longer run. Inflation will not run out of control if monetary management
is prudent. The key message here is, however, that the absolute quantity of monetary
stock is now permanently higher than before achieved in a very short period of time
driven by excess credit creation. Thus chances are slim that the ratio of M2 to nominal
GDP will easily be reversed. That also implies China’s inflation rate will be permanently
higher than before. The days of 2% are likely to be gone for good even if the headline
inflation subsequently starts easing in 2H11. That in turn calls for higher interest rates
and a stronger exchange rate ahead.
Interpretations of China’s medium term inflation outlook are crucial because subsequent
policy responses to the re-rating of inflation will affect the rest of the region.
• KR: The preliminary estimate for 4Q GDP was just announced this morning. On the
seasonally-adjusted annualized basis, Korea’s real GDP growth slowed to 2.2% QoQ
saar in 4Q10 from 3.0% in 3Q10. A significant contraction in investment was the main
drag as we have expected. Gross fixed capital formation declined -11.6% and reversed
the 12.9% gains in the preceding quarter, with construction investment and facilities investment
respectively falling -16.8% and -6.4%. By contrast, exports of goods and services continued to grow
a strong 9.9%, up from 6.9% in 3Q. Growth in private consumption expenditures decelerated
to 1.2% after jumping 5.1% in 3Q, but its average growth in 2H10 remained stable as
compared to 1H10.
The full-year GDP growth for 2010 averaged at 6.1%, close to our forecast of
6.2%. For 2011 we are maintaining our GDP forecast unchanged at 3.9%. We think that the growth weakness
in 4Q10 was caused by producers’ excessive worries about global slowdown, in combination
with the lagging effects of the authorities’ tightening measures targeted at the property
sector. As final demand from exports remains strong and the property market has
already started to revive from end-2010 thanks to eased regulations, we expect a
rebound in investment and overall economic growth going forward. The degree of
growth rebound in the year-beginning will have strong influence on the whole-year
GDP growth figures for 2011. Our current GDP forecast of 3.9% has pencilled in about
5% growth (QoQ saar) in 1Q11, followed by an average of 4% (on-trend growth)
during the next three quarters in 2Q-4Q11.
Fixed Income
• MY: Bank Negara is widely expected to leave its policy rate unchanged tomorrow, but
with the economic growth outlook remaining positive and annual inflation having
accelerated to 2.2% in December, further monetary policy tightening this year cannot
be ruled out. Market rates have already risen to reflect a greater probability of rate
hikes this year. Klibor futures now reflect a 56bps increase in 3M rates from 3.01%
currently to 3.57% by December. That means a return of short-term interest rates to
pre-crisis levels of around 3.5% this year is now priced into the swap curve. As such,
upward pressure on swap rates will likely lessen. The 1Y swap rate is likely to rise to
3.5% before end-1Q11 and the 3Y rate will likely rise to 4%. We continue to think that
with swap spreads having normalized, further increases in swap rates on the back of
rate hike expectations also mean upward pressure for MGS yields. Swaps are still likely
to underperform bonds, but the rise in bond yields is unlikely to trail the increase in
swap rates by much. Ten-year MGS yields have returned to their 10Y average level of
4.16% and are more likely to trade above it than below it in the coming months.
Looking Back
• US mkts: US stocks ended the overnight session flat ahead of tonight FOMC meeting.
The Dow Jones Industrial Average fell 0.03% to 11977.19 and the Nasdaq closed
0.06% higher at 2719.25. Treasury yields fell 4bps to 0.58% in the 2Y sector and 8bps
to 3.32% in the 10Y sector.
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