Conclusion: China broadly underperformed from both a financial markets and economic data perspective. We think that was due to a general lack of liquidity in China’s banking system, but one final PBOC rate-hike should not be completely ruled out.
This is the fourth installment of our now-weekly recap of prices, economic data, and key policy action throughout Asia. We’re aiming to keep our prose tight here, so if you’d like to dialogue more deeply regarding anything you see below, please reach out to us at .
The key callout from an equity market perspective is China’s negative divergence (-1.8% week-over-week vs. a group median gain of +1.3%). The Shanghai Composite Index did, however, hold a key level of quantitative support and we remain long the CAF in our Virtual Portfolio. In the FX market, the New Zealand dollar (NZD) had a monster week to the upside (+2.3%) on the heels of an elevated CPI reading (21-year high). In the fixed income market, Chinese 2yr sovereign bond yields increased 23bps week-over-week. This move is confirmed by money market rates and swaps spreads breaking out to new highs. It remains to be seen whether or not this is a leading indicator for a Chinese rate hike or merely indicative of a general lack of liquidity in the financing-based economy.
China: China printed a nasty preliminary July manufacturing PMI number (48.9); we think the Chinese growth continues to slow, but at slower rates. The recently announced tax reform initiative (scheduled to commence in September) should incrementally boost consumer spending in an environment of slowing inflation. We look for that to offset weakness in the manufacturing sector as external demand (US and Japan, in particular) slows.
Hong Kong: CPI accelerated to a 3-year high in June we remain bearish on Hong Kong equities for the intermediate-term TREND and long-term TAIL as growth continues to slow while inflation continues to accelerate. A peaking property bubble that the government is under increasing pressure to address from a policy perspective is decidedly bearish for the index’s financial and real estate developer stocks (over half the market cap of the Hang Seng Index).
Japan: Japan’s June trade data came in sequentially better in another sign that of the economy continuing its rebound off the March/April lows. We think it is short-lived, as Japan’s YoY economic growth data looks to materially slow in 2H. We remain bearish on Japanese equities (we’re short the EWJ in our Virtual Portfolio) for the intermediate-term TREND and long-term TAIL and are now bearish on the yen for the intermediate-term TREND ahead of a pending government shut down in Sept/October. We’ll be out with a detailed note on this topic early next week.
India: A weekly gauge of commodity inflation slowed and the recent move in India’s interest rate swaps market is supportive of our belief that the RBI is very close to the end of its tightening cycle. We remain cautious on Indian equities as our models have growth slowing in 3Q and inflation accelerating through August. Looking ahead to 4Q, we are quite bullish and if the Global Macro environment is favorable, the market may choose to look through the next 2-3 months of marginally negative economic data.
South Korea: The Bank of Korea made an important policy decision in support of long-term economic prosperity by prohibiting financial companies from buying bonds denominated in foreign currencies that have the intended use of financing domestic projects. This will limit the country’s aggregate external debt burden and may also supply upward pressure on domestic interest rates. Both are positive for the Korean won (KRW) from a long-term TAIL perspective. Our models continue to signal downside risk to Korean economic growth over the intermediate-term TREND – particularly in 4Q.
Australia: Per the monthly NAB survey and a quarterly Deloitte survey, business confidence continues to trend negatively amid a slowing domestic economy. Further, the RBA’s recent commentary is finally acknowledging of the domestic slowdown. Interest rate swaps, interbank rate futures, and corporate issuance of floating-rate debt (relative to fixed-rate issuance) are all signaling an RBA rate cut over the intermediate term. The 2Q CPI report (due July 27) will be critical to watch as it will likely shape the market’s perception around future RBA policy. We expect it show a sequential acceleration on a YoY basis, but it will likely slow on a QoQ basis (perhaps more important for policy). As such, we remain bearish on the Aussie dollar (AUD) for the intermediate-term TREND.
New Zealand: CPI accelerated to a 21-year high in 2Q alongside a sequential uptick in services PMI. The data supported a regional-best +2.3% appreciation in the New Zealand dollar (NZD/USD) on a week-over-week basis and it remains at record-highs. In spite of Prime Minister Key’s expressed concern regarding the strength of the kiwi dollar, our models would suggest further upside as inflation is set to make another high in 3Q.
Thailand: Trade data came in mixed in June (slower export growth; faster trade balance growth) and Bank of Thailand governor Prasarn Trairatvorakul implicitly suggested that he expects Thailand’s growth to accelerate in 2H by updating his 2011 GDP forecast (“a little more than 4%”). We are in wait-and-watch mode on Thai equities and would like to see more color on: 1) the new regime’s fiscal initiatives; and 2) the Bank of Thailand’s official response to such policies. Their bullish view of the Thai economy may lead them to continue hiking interest rates, which is bullish for the Thai baht (THB).
Singapore: Non-oil domestic export growth slowed materially in June and we continue to flag negative Asian trade data as a clean-cut signal that global demand is lower than where consensus believes it is – particularly in the US and Japan. Accelerating economic growth in 3Q could prove bullish for Singaporean equities for the intermediate-term TREND, while inflation continues to decelerate due to the Monetary Authority of Singapore’s proactive tightening. Further upside in the Singapore dollar (SGD) might be limited, as many of the supportive factors which kept us bullish are now in the rear-view.