As usual, we’re keeping it brief. Email us at if you’d like to dialogue further on anything you see below.
Both market prices (particularly across Asia’s fixed income markets) and economic data are confirming that consensus is not yet bearish enough on U.S./global growth.
Inclusive of this morning’s sell-off, Asian equity markets had a pretty mixed week – the first non-homogenous wk/wk price action we’ve seen MTD. Still, red outweighed green and the larger countries such as China, India, Japan, and Korea were leaders to the downside. Week-over-week price action in Asian FX markets echoed a similar tale of heterogeneity and the -1.4% decline in the New Zealand dollar led the way to the downside.
In Asian fixed income markets, 10yr sovereign yields declined broadly across the region on a wk/wk basis, supportive of growing concern about the outlook for global growth. A noteworthy callout remains the fact that the entire term structure of Australia’s sovereign yield curve is trading below the RBA’s policy rate of 4.75%. We saw mixed signals from a credit perspective; CDS declined broadly throughout the region while spreads over similar maturity U.S. Treasury debt mostly widened wk/wk.
In the interest rate swaps market, the key callout this week is China’s +14bps back-up in 1yr swap rates – indicating that market-based interest rate expectations have inflected, on the margin. We continue to think the PBOC remains on hold and, like the RBA, their next move is likely to be dovish rather than hawkish. The timing of each event will be a critical risk to manage. We remain bullish on Chinese equities and bearish on the Aussie dollar over the intermediate-term TREND.
China: Chinese officials announced three measures to spur cross-border yuan investment. Though not wholly original or earth-shattering, the cumulative impact of each additional measure inches the Chinese yuan one step closer to becoming a dominant currency in the international FX market. The measures include: a Hong Kong equity ETF vehicle for mainland investors, a $3.1B extension of the Qualified Foreign Institutional Investor Program (QFII), and a general relaxation of controls in the dim-sum bond market.
Elsewhere in the Chinese economy, Commerce Minister Chen Deming reiterated what Singaporean officials did last week by revising down his estimates for Chinese 2H trade growth, citing “shrinking Western demand”. Slowing growth in China remains 20 months old and we continue to highlight that we’d be long of Chinese financials and consumer stocks vs. all other things equity-related right now (we’re still long the CAF in our Virtual Portfolio).
Japan: Real GDP growth came in faster in 2Q on a QoQ SAAR basis (-1.3%), but flat on a YoY basis (-1%) due to a “suspicious” deceleration of the GDP deflator (-2.2% YoY). On a nominal basis, the economy is back at trough levels last seen since 1991. While consensus remains long of Japanese equities on earthquake reconstruction, our models suggest growth slows even further in 2H11. Japan’s sequentially-deteriorating July trade data (exports down -3.3% YoY; trade balance down -¥715.7B YoY) and the compressing JGB curve (10yr-2yr spread at a nine-month low of 85bps) is supportive of our view. The list of bearish data points and catalysts grows seemingly by the week; we remain the bears on Japanese equities for the intermediate-term TREND.
As the world’s third-largest economy remains mired in recession (starting in 4Q10 when we introduced our Japan’s Jugularthesis), Finance Minister Yoshihiko Noda reiterated that he’s ready and willing to “surprise” the FX market with “bold action”. While this is certainly a risk to our bullish outlook for the yen in the immediate term, Global Macro fundamentals will continue to drive the yen higher over the intermediate term. His leak that the central government is considering cutting spending by 10% in the upcoming fiscal year certainly does not help his cause.
India: Growth in India’s wholesale price index (India’s benchmark inflation gauge) slowed in July to +9.2% YoY. Our models continue to point to an August peak in this metric and then a sticky deceleration over the intermediate term. Recent commentary out of Indian officials is supportive of this view: “India’s inflation rate may peak in August around 10%... Until December, inflation will stay around the same levels,” according to Kaushik Basu, the chief economic advisor to India’s finance ministry. Moreover, the most recent central bank survey showed 3Q11 inflation expectations out of the Indian household sector declined on the margin to +11.9% YoY. Indian equities remain on our short list of Asian long ideas when our models signal to us that it’s time to increase our international equity exposure.
Australia: We put out a report last month titled: “We Wouldn’t Want to Be Glenn Stevens Right Now” which highlighted the confusing setup for the Reserve Bank of Australia’s monetary policy committee. On one hand, Australian economic growth is slowing. On the other hand, official inflation metrics continue to accelerate, like the country’s wage cost index (+0.9% QoQ in 2Q). We continue to side with Australia’s fixed income market by anticipating an RBA rate cut(s) over the intermediate term (see commentary above). As such, we remain the bears on the Aussie dollar over the intermediate-term TREND. Interestingly, Australia’s interest rate swaps market is pricing in -153bps of rate cuts over the NTM – down from a YTD high of +47bps (rate hikes). If Global Macro fundamentals do indeed take a turn for the worse, the AUD/USD has a great deal of Winner’s Risk (up +28.3% since last June) due to the fact that investors in distress typically sell what they can (book gains) vs. what they should (cut their losses).
Singapore: Prime Minister Lee Hsien Loong unveiled plans to expand public housing and medical benefits, as well as details on how Singapore will slow the intake of foreigners. While we do not like the Singaporean government caving in to populist demands, the details of the initiatives do indeed confirm that Singapore isn’t tinkering too much with (arguably) the world’s best organic growth model.
Elsewhere in the Singaporean economy, we saw that July export growth contracted the most since Oct ’09 (-2.8% YoY) as plunging global demand for Singapore’s electronics (-16.9% YoY) weighed on overall shipments. We continue to highlight risks to consensus forecasts of a 2H rebound in global growth with such nasty trade and production data coming out of Asia – the world’s key manufacturing hub.
Thailand: Thailand’s newly elected prime minister Yingluck Shinawatra confirmed that her government will fulfill a campaign promise to purchase (and hoard) unmilled rice at 15,000 ($502) baht per ton in the November harvest – an increase of +51.5% from the current market rate of 9,900 baht per ton. The scheme is designed explicitly to sustainably push up global rice prices by reducing supply on the global rice market (per the USDA, Thailand is the world’s number one rice supplier at roughly 32.2% of total exports). Asia, which accounts for roughly 87% of global rice consumption, is particularly at risk from a food inflation perspective and may ultimately limit the amount of monetary easing Asian central banks can pursue in the event the current global economic slowdown takes a turn for the worse.
Malaysia: Real GDP growth slowed -90bps in 2Q to +4% YoY from +4.9% YoY in 1Q, while CPI slowed -10bps in July to +3.4% YoY from +3.5% YoY in June. This 9:1 ratio of slowing GDP vs. slowing CPI highlights a key point we’ve been making in recent weeks – global growth is slowing while reported inflation remains sticky. Our call for furtherDeflating the Inflation across the commodity complex will eventually be passed through global supply chains to end-consumers, but the timing of that is something we are exercising caution on. Being early = being wrong.
New Zealand: New Zealand’s 2Q PPI reading is also supportive of our call on the lead/lag time of global supply chain dynamics, with input price growth (+0.9% QoQ) slowing by a marginal rate greater than 4x the sequential decline in output price growth (+1.4% QoQ). Shifting gears, the slowdown in New Zealand’s producer prices weighed on market interest rate expectations, with New Zealand’s interest rate swaps market pricing in -14bps less rate hikes over the NTM since the PPI report date. This goes a long way towards explaining the drastic underperformance of the Kiwi dollar this week.
Taiwan: Not all news out of Asia this week was sour: Taiwanese export orders growth accelerated in July to +11.2% YoY (vs. +9.2% YoY in June). Whether this is a red herring for bulled-up consensus expectations for 2H global growth remains to be seen. Still, as one of the few positive data points coming out of Asia in recent months, it’s worth flagging.