Conclusion: While nothing to get excited about from an absolute perspective, the month of DEC was positive, on the margin, for Asian economic data. We look for this trend to continue as growth slows at a slower pace throughout the region over the intermediate term.
- Equities: Asian equity markets closed up +0.9% wk/wk on a median basis… China and Vietnam were notable underperformers, down -1.6% and -4.2%, respectively.
- FX: Asian currencies were unchanged wk/wk on a median basis vs. the USD… Indonesia’s rupiah underperformed, down -1.1%... India’s rupee is down -14% vs. the USD over the last 12 months, which compares to a median -0.6% decline for the rest of the region.
- Sovereign Debt: Asian sovereign debt markets were relatively quiet wk/wk, with no outsized moves in either direction other than the -28bps compression in Indian 10yr yields.
- Sovereign CDS: Asian 5yr sovereign CDS markets were also quiet wk/wk, narrowing -1.4% on a median percentage basis... Japanese swaps posted the only positive divergence, widening +4.7% or +7bps.
- O/S Interest Rate Swaps: Asian 1yr swap rates broadly increased wk/wk, closing up +1.4% on a median percentage basis… Indonesia was a notable outlier, falling -10.6% or -65bps; this dramatic easing speculation rhymes with what we saw in the FX market… Indian swap rates are pricing in -77bps of cuts over the next year.
- O/N Interbank Rates: Asian interbank rates were particularly mixed wk/wk, despite holding flat on a median basis. Australia (-20bps/-4.4%), China (+59bps/+17.4%), Hong Kong (-24bps/-61.3%), and India (+25bps/+2.9%) highlight the intra-regional divergence.
Full performance tables can be found at the conclusion of this note.
CHARTS OF THE WEEK
While nothing to get excited about from an absolute perspective, the month of DEC was positive, on the margin, for Asian economic data. We look for this trend to continue as growth slows at a slower pace throughout the region over the intermediate term.
- China: Premier Wen Jiabao lent credence to our analysis which suggests Chinese continues to slow in 1Q by saying, “Business conditions may be relatively difficult this quarter.” He also said that “monetary policy will be fine-tuned as needed.” We interpret the combination of these two phrases to mean that no major changes to monetary policy should be expected in 1Q b/c Chinese policymakers are unlikely to be surprised by an incremental slowing of growth in the near-term.
- China: Business Climate and Entrepreneur Confidence Indexes both ticked down in 4Q to 128.2 and 122, respectively.
- India: Export growth slowed in NOV to +3.9% YoY from +10.8% prior.
- South Korea: Manufacturing PMI slowed in DEC to 46.4 vs. 47.1 prior. Moreover, Export growth slowed slightly in DEC to +12.5% YoY from +12.7% prior.
- Singapore: Real GDP growth slowed in 4Q to +3.6% YoY from +5.9% prior; QoQ SAAR growth also slowed: -4.9% vs. +1.5% prior.
- Indonesia: Export growth slowed in NOV to +8.3% YoY from +17.8% prior.
Growth Slowing’s Bottom:
- China: Manufacturing and Services PMIs ticked up in DEC to 50.3 and 56, respectively. The sub-indexes for New Orders, New Export Orders, and Order Backlog all increased MoM as well.
- Hong Kong: Manufacturing PMI ticked up in DEC to 49.7 from 48.7 prior.
- Taiwan: Manufacturing PMI ticked up in DEC to 47.1 from 43.9 prior.
- India: Both Manufacturing and Services PMIs ticked up in DEC to 54.2 from 51 and 53.2, respectively.
- Singapore: Manufacturing PMI ticked up in DEC to 49.5 from 48.7 prior.
- Indonesia: Consumer Confidence ticked up in DEC to 116.6 from 114.3 prior.
- Australia: Manufacturing and Services PMIs ticked up in DEC to 50.2 and 49, respectively.
Deflating the Inflation II:
- Taiwan: WPI slowed in DEC to +4.3% YoY from +5.3% prior.
- India: Inflation readings continue their downtrend in the week ended 12/24: Food Inflation slowed to -3.4% YoY; Primary Articles Inflation slowed to +0.1% YoY. Energy Inflation, which tracks the benchmark Wholesale Price Index far more tightly than the other two indexes, actually accelerated to +14.6% as crude prices remain elevated amid geopolitical tension.
- Indonesia: CPI and Core CPI slowed in DEC to +3.8% YoY and +4.3% YoY, respectively.
- Thailand: CPI and Core CPI slowed in DEC to +3.5% YoY and +2.7% YoY, respectively.
- Philippines: CPI and Core CPI slowed in DEC to +4.2% YoY and +3.4% YoY, respectively.
- India: Subir Gokarn, deputy governor of the Reserve Bank of India, said flat-out: “The monetary cycle has peaked.” While not at all a surprise, we do think his additional commentary confirms our view that the RBI is in a box as it relates to monetary policy: “The RBI is very concerned about the impact of rupee depreciation on inflation… The central bank remains more comfortable using open-market operations to inject liquidity for now, because cutting the cash reserve ratio would send a premature signal that the monetary policy stance has changed.” To that tune, Indian banks are taking advantage of RBI liquidity at an accelerating rate, borrowing an average of $22 billion a day from the central bank in DEC (up from $17.5 billion in NOV). We remain the bears on the Indian rupee, which has fallen -16.4% vs. the USD from its cycle peak in early AUG.
- Taiwan: CPI accelerated in DEC to +2% YoY from +1% prior.
- China: As it relates to what’s going to drive Chinese growth on the margin in 2012, Chinese Commerce Minister Chen Deming said that, “China will roll out measures to boost consumption this year.” This rhymes with Premier Jiabao’s commentary from earlier in the week: “China will continue to focus on rebalancing growth, restructuring the economy and increasing consumer and investment demand to support the real economy.” Deming continues: “The ministry will encourage companies to invest and make acquisitions overseas. China will also increase imports of energy products, raw materials, technologically advanced equipment, key components, and consumption goods this year.”
- China: China’s aforementioned top-down 2012 strategy outlook is consistent with persistent, central bank-induced CNY strength (just off an 18yr high vs. the USD); as such, we’ve seen reduced hedging activity in recent weeks: 1yr USD/CNY forwards are now trading at a -0.4% discount to the spot rate – up from -1.3% on 12/29. The offshore USD/CNY rate is now trading at a [slight] premium to the onshore rate for the first time since mid-SEP.
- China: Attempting to skirt a cash crunch ahead of Lunar New Year and the peak month for credit extension (JAN), the PBOC injected the most liquidity into the Chinese banking system this week as it has in eight weeks ($8.1B). Little-by-little, Chinese policymakers are doing what they can to engineer a soft landing, though we continue to believe they need more clarity on the inflation front (i.e. what Bernanke/Dudley/Evans are going to do next) in order to justify a major inflection.
- Japan: Japan, which needs to rollover $3 trillion in maturing sovereign debt this year (on top of another $566 billion in new issuance), has to refinance 31.2% of its outstanding sovereign debt load in 2012. That, combined with repeated warnings for incremental downgrade(s) – which may trigger ~$80 billion in Japanese bank capital raises – suggest that 2012 may be the year Japan has a sovereign credit event. Our thorough analysis of the JGB market suggests otherwise, but it is an intermediate-term tail risk we are monitoring. Prime Minister Yoshihiko Noda has recently vowed to overhaul the nation’s tax and social security systems and legislation proposing to double the 5% consumption tax in a few years is currently being debated in the Diet. Its passage may be critical to maintaining investor confidence in this market.
- Taiwan: Ahead of the JAN 14 presidential election, both of the leading candidates pledged to introduce capital gains taxes on transactions of properties to curb speculative buying. Look for the measure(s) to weigh on Taiwan’s real estate market going forward. Prices, which have doubled since 2000, are just shy of record levels.
- Thailand: In a classic show of fiscal and monetary prudence, Thai policymakers debated and ultimately resisted the urge to monetize $35 billion of legacy sovereign debt accrued from bank bailouts following the 1997 Asian Financial Crisis. Instead, they will protect the handshake of their currency by charging commercial lenders fees and drawing on central bank profits, if any.