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Conclusion: Both Asian economic data and financial markets are signaling to us that global growth remains under assault.


Positions in Asia: Short the Aussie dollar (FXA); Short a basket of Asian currencies (AYT).



Asian equities were generally softer over the prior week, falling -0.8% on a median basis. Declines were led by Japan, closing down -2.5% despite the Bank of Japan undertaking in a record intervention in the FX market to weaken the yen and boost exporter earnings. Asian currencies also finished generally weaker vs. the USD in the prior week, closing down -0.5% on a median basis. The Aussie dollar, a currency we’re short in the Virtual Portfolio, led declines across the region (-1.8% wk/wk).

On the short end of Asian sovereign debt yield curves (2yr), we’re seeing intra-regional divergences being created by the widening delta in monetary policy expectations based on individual growth/inflation dynamics (Australia -16bps wk/wk vs. Philippines +18bps wk/wk). Slowing growth continues to be priced into the longer dated maturities (10yr), with Australia (-24bps), Hong Kong (-16bps), and Indonesia (-11bps) leading the way to the downside wk/wk. 5yr CDS widened across the board in the last week, closing today at +7.2% wider on a percentage basis. Japan led the way to the upside, closing +15bps (+15.6%) wider.

Looser monetary policy continues to get baked into Asian interest rate swaps markets, with China closing the week down -35bps on the 1yr tenor. Australia, whose swaps have tightened the most in Asia in the YTD, closed the week down another -20bps. The Philippines, which put up a Sticky Stagflation-type inflation reading for October, saw their swaps widen +44bps wk/wk.


Rather than delineate these data points by country, given the varying size and importance of these economies, we thought we’d try something different by grouping them by theme. Ideally, this should make it easier to absorb and contextualize anything of significance. Lastly, the callouts below are from the prior seven days:

Global Growth Slowing:

  • Chinese non-manufacturing PMI ticked down in October to 57.7 vs. 59.3 prior.
  • Despite Japan’s record sales in the FX market (~¥8 trillion), the yen is essentially unchanged vs. the USD from where it closed on the day of the intervention. By not sterilizing the excess yen, the Bank of Japan is sending a key signal to the markets that economic growth remains a key issue for the world’s third-largest economy (currently mired in recession). JGBs were beneficiaries of the excess funds: 2yr, 10yr, and 30yr yields declined -9.9%, -4.9%, and -1.7% wk/wk, respectively. 
  • Thai industrial production growth slowed dramatically in September to -0.5 YoY vs. +6.8% prior. The multi-generationally large floods sweeping across the nation currently have contributed to the slowdown, shuttering  over 10,000 factories, displacing over 660k workers, and inundating roughly 15% of the homes across the country (population = 67 million).
  • Australia’s serviced PMI ticked down in October to 48.8 vs. 50.3 prior. Aussie retail sales were also weak (in Sept), slowing to +0.4% MoM vs. +0.6% prior.

King Dollar:

  • The Reserve Bank of Australia cut its growth forecast for the four quarters through 2Q12 by -50bps to 4%, citing “subdued conditions” as a result of slower private sector spending and borrowing and, of course, Europe. The markdown of growth assumptions alongside a reduction in inflation estimates as well (also -50bps), paves the way for another RBA rate cut in December – an event currently being priced into Australia’s interbank cash futures market (implied December yield of 4.235%) and into its overnight index swaps market (100% chance of a -25bps reduction being priced in; 16% chance of a -50bps reduction).

Eurocrat Bazooka:

  • Two Chinese officials reiterated our view that China is unlikely to take part in bailing out Europe as a source of uninformed, unlimited capital. Zhang Tao, director of the international department at the PBOC suggested that China needs further details regarding the options for bailing out Europe: “At present there’s no specific plan that people have clear understanding of,” he said. Zhu Guangyao, vice finance minister, had similar remarks regarding the EFSF: “There’s no concrete plans yet so it’s too early to talk about further investments in these tools.”

Deflating the Inflation:

  • In China, fixed-rate corporate debt has outperformed its floating-rate counterparts for the third consecutive month in October  (+2.9% vs. +1.1%) – the longest winning streak in over a year – as expectations for lower benchmark interest rates continue to gain traction. The PBOC injected $96 billion into the Chinese economy via open-market operations, causing the 7-day repo rate to fall a full -35bps since the start of last week.
  • Taiwanese CPI slowed in October to +1.2% YoY vs. +1.4% prior.

Sticky Stagflation:

  • Indian food inflation hit a nine-month high in the week ended 10/22: +12.2% YoY vs. +11.4% prior.
  • Philippine CPI accelerated in October to +5.2% YoY vs. +4.8% prior. Core CPI also accelerated: +3.9% YoY vs. +3.5% prior.


  • Hong Kong’s manufacturing PMI ticked up in October to 49 vs. a prior reading of 45.9. Still contracting sequentially, but a positive delta on the margin.
  • Singapore’s manufacturing PMI ticked up in October to 49.5 vs. a prior reading of 48.3. Like in Hong Kong, this measure is still contracting sequentially, but a positive delta on the margin.
  • Indonesian real GDP came in flat in 3Q at a +6.5% YoY clip – the third consecutive quarter of unchanged growth. Not bad, but not good either. Our models have Indonesian real GDP slowing 10-40bps from here in 4Q11E. Private consumption lagged other key growth drivers in 3Q, so the acceleration in consumer confidence in October (116.2 vs. 115 prior) may be supportive for consumption growth in 4Q.


  • The State Bank of India is getting a 30 billion rupee ($611 million) capital infusion from the government to bolster its capital ratios amid a rising defaults spurred by the RBI’s aggressive monetary tightening. This is part of a larger 200 billion rupee investment the government is making in state-run lenders to ensure the banks have Tier 1 capital ratios north of 8% each.
  • Thailand’s government has proposed a $26 billion fiscal package to aid flood recovery efforts. Details are still being ironed out, but, for reference, that amount is equivalent to 8.2% of Thailand’s real GDP, which is a rather sizeable stimulus package by global historic standards. This is on the heels of an October 30thAssumption University poll that showed three-quarters of Thais found the government’s relief efforts “inadequate”.

Darius Dale


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