Conclusion: We’re seeing some notable divergences within the flurry of economic data coming out of Asia over the past few days, all of which are analyzed in the callouts below. In addition, we update our intermediate-term outlooks for each major Asian economy, as well as how to play our views across asset classes.
Perhaps the most bullish data point we’ve seen out of China recently was today’s positive inflection in Manufacturing PMI, which accelerated sequentially in March to 53.4 vs. 52.2 in Feb. The report also showed that Input Prices ticked down in March, and, while still elevated, this is positive on the margin and rewarding of Chinese efforts to rein in inflation over the intermediate term.
Analyzing consensus’ recent moves, we see that an interest rate hike is expected in 2Q and more signs of the sell-side getting positive on China. We remain long Chinese equities as inflationary headwinds have become consensus and no longer carry the same level risk they did when we first called this out back in January 2010. Further, we think the Chinese economy has entered a bottoming process and is poised to reaccelerate over the intermediate term.
The release of the March Manufacturing PMI data confirmed that the recent natural disaster had a pronounced effect on the Japanese economy, ticking down to 46.4 vs. 52.9. With only 5% of the average number of replies (indicating a natural survivor bias), the extent of the quake/tsunami’s impact might have been understated and we expect further near term weakness in Japanese economic data. History and our quantitative models continue to support our view that it’s much too soon to get long the Japanese recovery trade.
Keep an eye on the BOJ; they will be growing pressure to monetize government debt in the coming weeks and are already hinting at an unprecedentedly large lending facility to prevent a wave of bankruptcies from sweeping the nation. Both history and empirical studies suggest this will ultimately end up in perpetuating structural inflation – an outcome that will be equally negative for the Japanese economy as it will be for the Japanese government and its bond holders. This remains a major TAIL risk for the global economy.
The latest weekly inflation report was essentially a wash on a wk/wk basis; prices still remain up double digits on a YoY basis, defying government efforts to cool the economy with the recent rate hikes. Credit growth continues unabated and, as we pointed out in a previous note, the subsidy and tax increases in the upcoming budget will be accretive to current inflationary pressures.
While the RBI continues to ratchet up its typically wildly inaccurate inflation projections, consensus has started calling on the bank to do more to slow the rate of price increases. Inflation is likely to remain a significant headwind for the Indian economy over the intermediate-term TREND, and the RBI’s poor response imposes significant risk of it needing to implement ultra-aggressive tightening measures in the latter half of this year.
The bulk of Korean economic data continues to go the wrong way, with the notable exception of today’s positive trade report. March Export growth accelerated and the 1Q Trade Balance widened on a YoY basis, which is accretive to Korea’s GDP growth. What’s dilutive to growth is accelerating inflation, which quickened to +4.7% YoY in March.
As we called out in November, Korea’s negative real interest rates continue to fuel inflationary pressure, which is only mitigated by recent strength in the won. That said, we think Korea’s relative passiveness in addressing the country’s growing inflation concerns increase the risk of the Korean central bank having to slam on the breaks later in the year. That’s a big negative, particularly given that PMIs (both Manufacturing and Non-Manufacturing) and Industrial Production were all going the wrong direction in the Feb-March period.
Despite all of this, the Kopsi Index has ripped to the upside and is now bullish from a TRADE & TREND perspective. We think the fund flows have rotated on the margin to Korea from Japan, as investors anticipate Korea picking up what used to be Japanese production and export orders. There’s a great deal or risk speculating on Korean equities at current prices, particularly given the trajectory of its domestic growth, as well as global growth (both are sloping down).
The story here is undoubtedly the Aussie dollar, which continues to rip alongside rising commodity prices and rising expectations for the Chinese economy (Australia’s largest export market). It doesn’t hurt that Australia will eventually be called upon to ship larger amounts of materials to its second-largest export market (Japan). Australia’s terms of trade haven’t been higher since the 1950’s, according to the Austrian government, and those very terms look to continue onward and upward over the intermediate term.
That said, we do see a few major risks to chasing the Aussie dollar beyond its current all-time highs: 1) Dr. Copper isn’t confirming a reacceleration in Chinese or global growth; 2) Australia’s near-term trade data stands to roll over alongside its manufacturing data (PMI rolled over in March); and 3) Glenn Stevens and the RBA stand ready to actually cut rates if the global economy falters over the next 3-6 months – which we anticipate. Needless to say, there is a definite air-pocket under the Aussie dollar and any reversal of price momentum carries significant downside risk in our model.
As an aside, the global FX market might be sniffing out a potentially lucrative opportunity for Aussie-based purchases of US Treasuries on a rolling-hedged basis. We urge caution here, as it remains to be seen whether the US Treasury market can withstand the end of QE2 and the upcoming debt ceiling debate. Stay tuned.
We’re getting more constructive on both the Indonesian economy and equity market here, aided by decelerating inflation (March CPI slowed to +6.7% YoY), which is boosting Consumer Confidence (107.1 in March vs. 106.4 in February). A widening Trade Balance further augments the case for Indonesian GDP growth coming in above consensus expectations. We continue to be bullish on the Indonesian rupiah and the currency’s recent strength limits the central bank’s need to continue hiking rates, though we do think they will continue to be hawkish over the near-to-intermediate term.
Hong Kong economic data continues to go the wrong way in February: CPI accelerated to a 30-month high, Trade Balance contracted, Money Supply (M2) growth slowed, Retail Sales growth decelerated, and the Government’s Budget Balance deteriorated. Despite this, the Hang Seng Index looks like it wants to go along for the ride and join China on a bullish breakout. Aided by the yuan appreciation story and its own inflationary headwinds, we remain bullish on the Hong Kong dollar.
CPI on both a Headline and Core basis ticked up in March to +3.1% YoY and +1.6% YoY, respectively, and we think the subsidies currently being handed out by the government in advance of this year’s elections (“buying” votes) will only add to the current inflationary pressure over the intermediate term. We remain bullish on Thai interest rates/bearish on Thai local currency bonds.
Thai equities are now bullish from an intermediate-term TREND perspective – a sign that growth expectations are reaccelerating and a leading indicator that the upcoming elections are likely to go off without any major hitches. Given the scope of last year’s political protests, we find such expectations to be hopeful at best. Last, but certainly not least, there is a lot of mean reversion risk in owning Thai equities right here and now – particularly given the amount geopolitical risk that could flare up any given moment. In addition, inflation looks poised to break out to the upside over the intermediate-term.
We’ve remained bullish on the Singapore dollar since last July on the strength of robust growth and accelerating inflation. Now, both factors are starting to go the wrong way for the currency. Industrial Production growth slowed in Feb to +4.8% YoY vs. +11% YoY in Jan. Non-Oil Export growth slowed measurably in Feb to +7.8% YoY vs. +20.7% YoY in Jan. CPI decelerated for the first time since October in Feb to +5% YoY vs. +5.5% in Jan.
While it appears the strong currency (+10.8% over the past 12 months) is starting to weigh on exports, we can’t help but point out its positive impact on the Singapore consumer: Retail Sales growth (ex-Auto) accelerated in Feb to +15.6% YoY in Jan and we look for that trend to continue with unemployment hovering near a two-year low. Further, PMI data continues to look healthy, accelerating in all but one subcomponent in Feb. Despite this economic health, we remain cautious on Singaporean equities, as their export and manufacturing growth looks to suffer from Japanese supply constrains, as well as a slowdown in US and European consumer demand.