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Monday’s The Week Ahead
(originally meant to be released in January but now delayed indefinitely) Still the
recent weaker production data would definitely have some influence on official
thinking. All factors considered, we think the central bank will continue to move at a
measured pace in tightening rates tomorrow as well as in the year ahead. While
markets are worried about higher rates slowing growth, our 2011/12 GDP projection
of 8.5% already factored in the risk of higher rates and other headwinds from an
increasingly imbalanced growth story. We also note that GDP growth clocked over
9% in 2007-08 when the repo rate was above 7%. As such, in 2011/12, we think growth
would have been higher than our projection of 8.5% if not for the additional rate
hikes.
• SG: CPI inflation for Dec10 is due today while industrial production for the same
month is on tap this Wednesday. The headline inflation reading is expected to soar to
4.7% YoY, up from 3.8% in the previous month. Base effect is one thing but higher
COE prices, food and fuel prices, on top of the festive season effect are the factors
driving inflation higher. In December, the COE prices hit a multi-year high; the global
food price index (FAO) by the United Nation surged passed the previous peak in 2008
whereas oil prices, though at about USD 90/bbl, appears to be inching gradually
towards the USD 100/bbl mark. While December inflation number will surely become
the headline news, the point to note is that higher than normal inflation is here to
stay for much of this year. Expect inflation to stay above the 4% level in the next few
months with food inflation and the Chinese New Year effect coming into the limelight.
Going forward, oil prices and wage inflation will start to feature more prominently in
the CPI index. Our forecast for full year inflation remains at 3.2%, which is higher than
the official forecast range of 2-3%.
Industrial production for December 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.
• MY: Bank Negara policy meeting will convene this Thursday and market is expecting
the central bank to hold the Overnight Policy Rate (OPR) steady at 2.75% after the
meeting. We tend to agree as inflation is still well within the comfort zone of the
authority while growth momentum appears to have slowed based on most recent
GDP data. Latest inflation reading registered 2.2% YoY in December, a level which
some of the regional countries (e.g. China, India, Vietnam and Indonesia) will be
envious of given the rising inflationary pressure in their domestic economy. Credits
should be given to the policymakers in Bank Negara for taking decisive and preemptive tightening move in early 2010 despite the risks associated with the European
debt crisis then. When central banks across the region put on hold their plans to
normalize monetary policy due to the debt crisis, Bank Negara went ahead with a
75bps rate hikes to nip inflation at its bud and to prevent financial imbalances. That
best explains the current modest inflation that the economy is enjoying. That said, the
appreciation in Ringgit has also part an important role in keeping imported inflation
at bay. The local currency was one of the best performing emerging Asia currencies
last year. It appreciated by 10.6% against the greenback in 2010. Going forward, we
think that with global inflationary pressure picking up more prominently, Bank Negara
will likely resume its interest rate normalization process in March. We expect another
50bps for this year to balance the risks between growth and inflation.
G3
• US: The sum of all things – GDP – is on tap this week. Consensus expects 4Q output to
advance by 3.5% (QoQ, saar) – the strongest showing in 4.75 years – partly on the
back of accelerating consumption growth and partly on the back of a November
trade spike that will be imputed into the December figures (not yet released) in
calculating the overall 4Q GDP estimate. Our guess is the final figure will be closer to
3% but no need to spoil the party this week. Consumption is indeed running very
strongly and, for that matter, so is total domestic demand growth (which also includes
housing, business investment and government spending). Indeed, strong domestic
demand growth (with or without the government included) is something we have
noted many times here. Back in 2Q and 3Q of 2010, when many were worried about
a double-dip, DD had in fact accelerated to a 5-year high of nearly 5% (QoQ, saar).
Now that the volatility in the trade numbers is subsiding (which made GDP look low
when demand was high), that underlying / true growth is shining through.
Growth isn’t yet strong enough to alter Fed policy. The FOMC meets this week, and
with the unemployment rate still at 9.4% and core inflation running at 0.8% YoY, it
will see no reason to pull in the reins on QE2 just yet. At current rates of Treasury
purchases, QE2 should run until late-June. Even if the unemployment rate continues
to drop sharply (we think it will continue to fall but not sharply) the Fed would not
likely be pressured to change course until April or May, i.e., after the cat is pretty much
out of the bag already. We continue to look for a first Fed hike in the fourth quarter
of this year and (Fed fund futures) markets have, as of December, re-priced a first Fed
hike back into 4Q11 as well.
Fixed income
• US: While the growth outlook has improved over the past two months, the FOMC
meeting on Wednesday will probably not result in any changes to the Treasury purchase
plan announced in November. The risks associated with withdrawing monetary stimulus
too early simply are greater than the risks associated with withdrawing stimulus too
late. However, with Bernanke saying that expectations for 3-4% real GDP growth this
year are reasonable, the post-meeting statement will have to sound more positive
than the December 14 text. The impact on the market for US Treasuries is likely to be
limited, as all this has been priced in. Treasury yields have risen enough to reflect the
growth and inflation implication of the latest round of monetary and fiscal stimulus
measures. Given current consensus expectations for real GDP growth of 3.1% and
annual CPI inflation of 1.7% this year, 3% to 3.5% is a reasonable trading range for
10Y yields for now. Real GDP growth of 3% this year sounds about right and that kind
of growth should mean that deflation risks are low. Now, it’s all going to be about the
budget deficit and whether a rate hike story gains traction this year. We think both
factors have the potential to steepen the Treasury curve further and expect Treasury
yields to end the year higher.
Looking back
• US mkts: US stocks closed mixed on Friday as industrial stocks gained after a positive
earnings report from General Electric. The Dow Jones Industrial Average rose 0.41% to
118711.84 and the Nasdaq closed 0.55% lower at 2689.54. Treasury yields fell 2bps to
0.62% in the 2Y sector and 4bps to 3.41% in the 10Y sector.
Greater China, Korea
• KR: The preliminary estimate for 4Q GDP (due Wed) will likely show weak growth in
quarter-on-quarter terms (consensus: 0.4% QoQ sa, DBSf: 0.2%). The annualized QoQ
growth will be significantly lower than a potential rate of 4%, also decelerating from
the 3% rate recorded in the preceding quarter. The main drag is likely to come from a
slowdown in inventory and fixed investment. Industrial production and equipment
investment indices both fell sharply during the Oct-Nov period (-11.8% and -25.9%
3m/3m saar respectively), reflecting the deterioration of business sentiment in the
manufacturing industry on worries about global slowdown. With regard to the final
demand, both exports and domestic consumption expenditures held up well actually.
Custom exports data beat market expectations in 4Q. Even excluding the inflating
effects of price increases, we estimate that the volume of merchandise exports has risen
by a decent 11% 3m/3m saar as of Nov10. Meanwhile, domestic private consumer
spending has continued to be supported by the improvement in employment and
income conditions combined with the revival in the housing market, offsetting the
negative impact from higher food and oil inflation. The volume of retail sales has
maintained on-trend growth of 4.1% 3m/3m saar as of Nov10. The intact strength in
final demand implies that the downward adjustment in investment in 4Q was excessive
and unwarranted. We believe the softness in 4Q GDP numbers is temporary. The central
bank is likely to assess growth outlook and pause on interest rates in February, but
unlikely to alter the policy direction of rate normalization. The central bank’s policy
priority this year remains to manage inflation and inflation expectations.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Monday’s The Week Ahead
Southeast Asia, India
• IN: All eyes will be on the Reserve Bank of India (RBI) policy meeting tomorrow.
Inflation has leaped higher in December led by an especially large rise in food prices.
Expectations are for a 25bps hike but there are calls for a 50bps hike from many
quarters to nip the inflation genie in the bud. DBS expectation is for a 25bps hike at
this meeting but we think this will soon be followed by another 25bps hike at the
meeting in March. We also expect the repo rate to rise to 7.50% by end-Dec11.
We continue to think food inflation is increasingly a structural issue driven by rising
demand or at least enduring gaps in food demand and supply (more on this in our
special report out today). However, the recent rise in food prices is especially concentrated
in vegetable prices. Both the narrowly based food inflation and the extremely sharp
rise in vegetable prices suggest December’s food inflation is more a temporary weather
related phenomenon. Of course, this doesn’t mean generalized price pressures are
absent or that food inflation can be completely down-played. Core inflation as proxied
by WPI manufacturing inflation ex-food has also been on the rise especially in the last
three months. In December, ‘core’ inflation rose to 8% (MoM, saar) and in 4Q10 core
inflation averaged 6% (QOQ, saar), both above central bank comfort level of 5%.
Also, food inflation has been elevated even before the sudden supply-driven rise in
December and can therefore easily embed itself in wage expectations and thereby
lead to wage-price spiral. As such, our thinking is the RBI needs to keep its feet on the
rate hike pedal a little longer but it doesn’t have to apply sudden brakes yet.
On the growth front, recent weaker industrial production data stand in contrast to
other strong data such as PMI, vehicle sales and bank credit. The newer industrial
production data with the 2004-05 base will also likely show faster production growth
(originally meant to be released in January but now delayed indefinitely) Still the
recent weaker production data would definitely have some influence on official
thinking. All factors considered, we think the central bank will continue to move at a
measured pace in tightening rates tomorrow as well as in the year ahead. While
markets are worried about higher rates slowing growth, our 2011/12 GDP projection
of 8.5% already factored in the risk of higher rates and other headwinds from an
increasingly imbalanced growth story. We also note that GDP growth clocked over
9% in 2007-08 when the repo rate was above 7%. As such, in 2011/12, we think growth
would have been higher than our projection of 8.5% if not for the additional rate
hikes.
• SG: CPI inflation for Dec10 is due today while industrial production for the same
month is on tap this Wednesday. The headline inflation reading is expected to soar to
4.7% YoY, up from 3.8% in the previous month. Base effect is one thing but higher
COE prices, food and fuel prices, on top of the festive season effect are the factors
driving inflation higher. In December, the COE prices hit a multi-year high; the global
food price index (FAO) by the United Nation surged passed the previous peak in 2008
whereas oil prices, though at about USD 90/bbl, appears to be inching gradually
towards the USD 100/bbl mark. While December inflation number will surely become
the headline news, the point to note is that higher than normal inflation is here to
stay for much of this year. Expect inflation to stay above the 4% level in the next few
months with food inflation and the Chinese New Year effect coming into the limelight.
Going forward, oil prices and wage inflation will start to feature more prominently in
the CPI index. Our forecast for full year inflation remains at 3.2%, which is higher than
the official forecast range of 2-3%.
Industrial production for December 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.
• MY: Bank Negara policy meeting will convene this Thursday and market is expecting
the central bank to hold the Overnight Policy Rate (OPR) steady at 2.75% after the
meeting. We tend to agree as inflation is still well within the comfort zone of the
authority while growth momentum appears to have slowed based on most recent
GDP data. Latest inflation reading registered 2.2% YoY in December, a level which
some of the regional countries (e.g. China, India, Vietnam and Indonesia) will be
envious of given the rising inflationary pressure in their domestic economy. Credits
should be given to the policymakers in Bank Negara for taking decisive and preemptive tightening move in early 2010 despite the risks associated with the European
debt crisis then. When central banks across the region put on hold their plans to
normalize monetary policy due to the debt crisis, Bank Negara went ahead with a
75bps rate hikes to nip inflation at its bud and to prevent financial imbalances. That
best explains the current modest inflation that the economy is enjoying. That said, the
appreciation in Ringgit has also part an important role in keeping imported inflation
at bay. The local currency was one of the best performing emerging Asia currencies
last year. It appreciated by 10.6% against the greenback in 2010. Going forward, we
think that with global inflationary pressure picking up more prominently, Bank Negara
will likely resume its interest rate normalization process in March. We expect another
50bps for this year to balance the risks between growth and inflation.
G3
• US: The sum of all things – GDP – is on tap this week. Consensus expects 4Q output to
advance by 3.5% (QoQ, saar) – the strongest showing in 4.75 years – partly on the
back of accelerating consumption growth and partly on the back of a November
trade spike that will be imputed into the December figures (not yet released) in
calculating the overall 4Q GDP estimate. Our guess is the final figure will be closer to
3% but no need to spoil the party this week. Consumption is indeed running very
strongly and, for that matter, so is total domestic demand growth (which also includes
housing, business investment and government spending). Indeed, strong domestic
demand growth (with or without the government included) is something we have
noted many times here. Back in 2Q and 3Q of 2010, when many were worried about
a double-dip, DD had in fact accelerated to a 5-year high of nearly 5% (QoQ, saar).
Now that the volatility in the trade numbers is subsiding (which made GDP look low
when demand was high), that underlying / true growth is shining through.
Growth isn’t yet strong enough to alter Fed policy. The FOMC meets this week, and
with the unemployment rate still at 9.4% and core inflation running at 0.8% YoY, it
will see no reason to pull in the reins on QE2 just yet. At current rates of Treasury
purchases, QE2 should run until late-June. Even if the unemployment rate continues
to drop sharply (we think it will continue to fall but not sharply) the Fed would not
likely be pressured to change course until April or May, i.e., after the cat is pretty much
out of the bag already. We continue to look for a first Fed hike in the fourth quarter
of this year and (Fed fund futures) markets have, as of December, re-priced a first Fed
hike back into 4Q11 as well.
Fixed income
• US: While the growth outlook has improved over the past two months, the FOMC
meeting on Wednesday will probably not result in any changes to the Treasury purchase
plan announced in November. The risks associated with withdrawing monetary stimulus
too early simply are greater than the risks associated with withdrawing stimulus too
late. However, with Bernanke saying that expectations for 3-4% real GDP growth this
year are reasonable, the post-meeting statement will have to sound more positive
than the December 14 text. The impact on the market for US Treasuries is likely to be
limited, as all this has been priced in. Treasury yields have risen enough to reflect the
growth and inflation implication of the latest round of monetary and fiscal stimulus
measures. Given current consensus expectations for real GDP growth of 3.1% and
annual CPI inflation of 1.7% this year, 3% to 3.5% is a reasonable trading range for
10Y yields for now. Real GDP growth of 3% this year sounds about right and that kind
of growth should mean that deflation risks are low. Now, it’s all going to be about the
budget deficit and whether a rate hike story gains traction this year. We think both
factors have the potential to steepen the Treasury curve further and expect Treasury
yields to end the year higher.
Looking back
• US mkts: US stocks closed mixed on Friday as industrial stocks gained after a positive
earnings report from General Electric. The Dow Jones Industrial Average rose 0.41% to
118711.84 and the Nasdaq closed 0.55% lower at 2689.54. Treasury yields fell 2bps to
0.62% in the 2Y sector and 4bps to 3.41% in the 10Y sector.
Greater China, Korea
• KR: The preliminary estimate for 4Q GDP (due Wed) will likely show weak growth in
quarter-on-quarter terms (consensus: 0.4% QoQ sa, DBSf: 0.2%). The annualized QoQ
growth will be significantly lower than a potential rate of 4%, also decelerating from
the 3% rate recorded in the preceding quarter. The main drag is likely to come from a
slowdown in inventory and fixed investment. Industrial production and equipment
investment indices both fell sharply during the Oct-Nov period (-11.8% and -25.9%
3m/3m saar respectively), reflecting the deterioration of business sentiment in the
manufacturing industry on worries about global slowdown. With regard to the final
demand, both exports and domestic consumption expenditures held up well actually.
Custom exports data beat market expectations in 4Q. Even excluding the inflating
effects of price increases, we estimate that the volume of merchandise exports has risen
by a decent 11% 3m/3m saar as of Nov10. Meanwhile, domestic private consumer
spending has continued to be supported by the improvement in employment and
income conditions combined with the revival in the housing market, offsetting the
negative impact from higher food and oil inflation. The volume of retail sales has
maintained on-trend growth of 4.1% 3m/3m saar as of Nov10. The intact strength in
final demand implies that the downward adjustment in investment in 4Q was excessive
and unwarranted. We believe the softness in 4Q GDP numbers is temporary. The central
bank is likely to assess growth outlook and pause on interest rates in February, but
unlikely to alter the policy direction of rate normalization. The central bank’s policy
priority this year remains to manage inflation and inflation expectations.
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