Topics discussed this week:
- Divergence in Monetary Policy: Decidedly Dovish Camp
- Divergence in Monetary Policy: Not Dovish = Hawkish Camp
- Time for Asian Equities & FX to Take a Breather?
Divergence in Monetary Policy: Decidedly Dovish Camp
Over the last week or so, we’ve gotten a number of key macro data points that would suggest to us that, at least for the time being, the region’s intermediate-term monetary policy outlook has become increasingly divergent. This could, of course, change with further data, but for now we feel compelled to highlight the disparity because it could potentially set the table some notable divergences in cross-asset performance going forward.
China: Make no mistake about it, China’s FEB inflation report was flat-out dovish, with CPI slowing to a 20-month low of +3.2% YoY and PPI slowing to a 27-month low of +0.0% YoY. The sharp decline CPI was predicated by an even sharper decline in food inflation – a key factor we have been flagging in recent weeks as supportive of continued downside in EM CPI readings.
From a policy impact perspective, we continue to believe inflation statistics, rather than the trend in growth data carries more weight in China from a monetary policy standpoint – especially given the rising domestic focus on income inequality as flagged during the National People’s Congress by Politburo member Bo Xilai and NPC chief Wu Bangguo. Inflation remains a tax on China’s rural poor.
From a growth perspective, the Chinese economy continues to trend along with our expectations and the directional targets of the State Council. To that tune, China’s JAN-FEB data came in fairly light and, while we don’t expect the PBOC to overreact in a dovish manner given the State’s policy objectives, we do think the not-so-hot economic data only amplifies the monetary easing signals being transmitted via China’s inflation statistics.
Japan: Not really a traditional call on the country’s GROWTH/INFLATION dynamics, we think the Bank of Japan is actually under accelerating political pressure to increase the size of their ¥30 trillion asset purchase program for a second-straight meeting to affirm their commitment to reaching their recently-adopted +1% inflation target.
Regarding the target specifically, Japanese lawmakers on both sides of the aisle have been lobbying the central bank to actually increase it to +2-3%. While we don’t expect that to happen at next week’s monetary policy board meeting (MAR 12-13), we do expect Shirakawa and his team may appease policymakers in the form of incrementally dovish policy – if nothing but to shrink the growing political target on their backs. Both Japan’s currency (down -7.5% since the start of FEB) and Japanese breakeven rates agree with this view.
India: Overnight, the Reserve Bank of India came out and reduced the nation’s cash reserve ratio by -75bps to 4.75%. Two things stand out to us from this decision:
- The move was an acceleration in the magnitude of cuts to the cash reserve ratio, which was last reduced by -50bps on JAN 24; and
- The action came ahead of next week’s monetary policy board meeting (MAR 15), which suggests to us that they felt the urge to accelerate the steps they are taking to ease a liquidity crunch in the banking system. Thus far, the move has worked, with Indian banks borrowing the least of amount of cash from the central bank over any five-day period since early NOV.
The RBI’s increase in aggression with regards to monetary easing supports our view that rate cuts are definitively on the table at India’s upcoming monetary policy meeting. A recent string of weak growth data (slowing FEB Manufacturing and Services PMIs; Real GDP growth at a 10-quarter low in 4Q11) and benchmark wholesale prices slowing to a 26-month low of +6.6% YoY in JAN are supportive of this view as well as our near-term GROWTH/INFLATION modeling outlook.
Australia: Kudos to Glenn Stevens and Co. for resisting political pressure to lower interest rates (in order to provide some relief to the currency) at the last monetary policy board meeting on MAR 5. Based on the latest string of domestic and international growth data, however, we don’t think the Reserve Bank of Australia will be able to resist cutting it benchmark interest rate at their upcoming meeting on APR 2:
- FEB Unemployment Rate: +5.2% vs. +5.1% prior
- FEB Payrolls: -15.4k MoM vs. +46.2k prior
- Full-Time: flat MoM vs. +15.3k prior
- Part-Time: -15.4k MoM vs. +30.9k prior
- FEB Services PMI: 46.7 vs. 51.9 prior
- FEB Manufacturing PMI: 51.3 vs. 51.6 prior
- FEB Construction PMI: 35.6 vs. 39.8 prior
- 4Q GDP: +2.3% YoY vs. +2.6% prior
- QoQ: +0.4% vs. +0.8% prior
- FEB TD Securities Unofficial CPI: +2% YoY vs. +2.2% prior
China (25.1% of Aussie exports):
- YTD Industrial Production: +11.4% YoY vs. +13.9% in DEC
- YTD Urban Fixed Assets Investment: +21.5% YoY vs. +23.8% in DEC
- YTD Retail Sales: +14.7% YoY vs. +17.1% in DEC
Japan (18.9% of Aussie exports):
- FEB Manufacturing PMI: 50.5 vs. 50.7 prior
- FEB Machine Tool Orders: -8.6% YoY vs. -6.9% prior
Ahead of the APR 3 monetary policy announcement, Australia will release its MAR Manufacturing PMI on MAR 31, its FEB CPI (unofficial reading) on APR 1, and its FEB Retail Sales data on APR 2. We expect each data point to continue trending dovishly with respect to monetary policy. Interestingly, Australian interest rate markets are misaligned with our near-term fundamental view from a directional perspective and, as such, we expect the Aussie dollar to come under pressure on an immediate-term TRADE duration given that our view is likely to get priced in over the coming weeks.
Thailand/Taiwan/Philippines/Vietnam: Officials from each central bank have come out in recent weeks pledging to maintain accommodative monetary policy amid heightened risks to domestic and global growth. Keeping it brief for now; we’re happy to follow up more if you’d like.
Divergence in Monetary Policy: Not Dovish = Hawkish Camp
South Korea: Rhetorically, Korean policymakers have been the most hawkish throughout Asia in recent weeks:
Bank of Korea Governor Kim Choong Soo at the G20 Summit (FEB) and per the latest monetary policy report (MAR 7):
- “Oil prices are adding to inflation pressures.”
- “The Bank of Korea will seek to lower inflation expectations.”
- “I am suspicious that more macroeconomic stimulus by advanced economies can be a solution to reviving growth.”
- “The South Korean economy is unlikely to slow further.”
Finance Minster Bahk Jae Wan:
- “Monetary policy in advanced economies is also adding to price pressures in [South Korea]. It’s not only the oil price hike but also quantitative easing in the major countries, like the U.S. and the European countries and Japan. Because of that there is an abundance of liquidity going around the world, so there is also an inflationary pressure from the outside.”
- “While inflation is likely to dip this month below the +3.4 percent rate in January and be even lower in March, instability in the oil market threatens to push overall consumer prices above the government’s +3.2 percent target for the year.”
- “Rising oil prices are one of the biggest concerns for South Korea... A +10 percent increase in the cost of crude pushes inflation up by +0.12 percentage point.”
- “I am hopeful that the Korean economy will bottom out in the first quarter and go on the path of recovery in the second quarter.”
Looking forward, we don’t expect the Bank of Korea to actually hike rates anytime soon – a view supported by two things:
- The U.S. Dollar Index is holding above its intermediate-term TREND line of support and we view stability/strength in the USD as a clear headwind for commodity inflation/perpetuator of commodity deflation; and
- Our baseline GROWTH/INFLATION/POLICY model suggests Korea is under no pressure to move rates higher at least through 2Q.
That said, however, Korean interest rate markets certainly side with our fundamental view that there is asymmetric risk for the Bank of Korea to tighten, rather than ease monetary policy over the intermediate-term TREND. For example, even throughout the thralls of the 2H11 risk aversion, neither 1yr Sovereign Yields nor 1yr O/S Interest Rate Swaps began pricing in any rate cuts out of the Bank of Korea – a notable divergence from many of the region’s other economies.
Indonesia: Since the start of 4Q11, Bank Indonesia has been among the world’s most aggressive central banks, lowering its benchmark interest rate -100bps to 5.75% in a series of three cuts (-25bps, -50bps, -25bps). Their aggression has been well-deserved; Indonesian CPI has been nearly halved, slowing from a cyclical peak of +7% YoY in JAN ’11 to +3.6% in FEB.
At its latest meeting, however, the bank refrained from lowering rates further, as President Susilo Bambang Yudhoyono’s cabinet proposes to hike the price of subsided fuel by +33% to 1,500 rupiah per liter in addition to a proposed +10% hike in electricity prices. If enacted, both proposals threaten to apply a fair amount of upside pressure on domestic inflation readings in the coming months. In its latest policy decision, Bank Indonesia board members said they would “respond to a surge in costs, if needed”.
For now, Indonesia’s sovereign debt and currency markets foresee a continued dovish outlook; as a result, the latter is underperforming other regional currencies vs. the USD across multiple durations:
- 1 WK: IDR/USD -0.2% vs. a regional median decline of -0.1%
- 1 MO: IDR/USD -1.7% vs. a regional median decline of -0.2%
- 3 MO: IDR/USD -0.6% vs. a regional median gain of +2.2%
- 6 MO: IDR/USD -6.1% vs. a regional median decline of -0.3%
- 12 MO: IDR/USD -3.8% vs. a regional median decline of -0.4%
- YTD: IDR/USD -0.3% vs. a regional median gain of +3.0%
All told, the energy price proposals loom in the distance and are very likely to shape the course of Indonesian monetary policy throughout 2012. We’ll find out more soon; approval of the 2012 budget review is due over the next month or so.
Given the likelihood of passage amid the recent run-up in global petroleum prices, we would expect to see the rupiah outperform other regional currencies over the intermediate-term TREND – a trend that is likely to be coincident with a continuation of Indonesia’s recent equity market underperformance. In leading fashion, the Jakarta Composite Index is up only +4.4% YTD vs. a regional median gain of +12%.
New Zealand/Malaysia: Officials from each central bank have come out in recent weeks highlighting domestic and international inflationary pressures amid holding interest on rates. Keeping it brief for now; we’re happy to follow up more if you’d like.
Time for Asian Equities & FX to Take a Breather?
While it’s certainly not in our nature to make a bevy of broad, explicit calls across an entire region, we are keen to flag what we think could be appropriate opportunities to revisit one’s exposure to certain asset classes from a short-to-intermediate-term perspective. On that note, we think there is a great deal of good news priced into Asian equities and currencies at the current juncture. While that is not to say additional gains are not to be had in the near term, we would be leery of further strength across Asian equity markets and FX over the intermediate term.
Generally speaking, global investor complacency is just shy of APR ’11 highs, as measured by our proprietary Global Macro Volatility Index – a series that coagulates various volatility measures across multiple asset classes (equities/FX/fixed income/commodities).
Of course, investor complacency can last for unreasonably long amounts of time, so we aren’t making the call that reaching this level will be followed promptly by a sell-off. We are, however, flagging that there is an asymmetric setup for mean reversion over the intermediate term. To note, our volatility index is inversely correlated to the MSCI All-Country Asia Pacific Equity Index to the tune of -64% over the past three years and the inverse correlation is even higher for Asian currencies (-83% over that same duration).
Fundamental Price Data
All % moves week-over-week unless otherwise specified.
- Median: -0.8%
- High: New Zealand +1.7%
- Low: Hong Kong -2.2%
- Callout: Japan +17.4% YTD vs. a regional median gain of +12%
- FX (vs. USD):
- Median: -0.1%
- High: Philippine peso +0.4%
- Low: Australian dollar -1.5%
- Callout: New Zealand dollar +11.5% over the LTM vs. a regional median gain of +0.4%
- S/T SOVEREIGN DEBT (2YR YIELD):
- High: Indonesia +14bps
- Low: Australia -14bps
- Callout: Philippines +73bps YTD
- L/T SOVEREIGN DEBT (10YR YIELD):
- High: Indonesia +21bps
- Low: Australia, Vietnam -10bps
- Callout: Thailand +17bps YTD
- SOVEREIGN YIELD SPREADS (10s-2s):
- High: India, Indonesia +7bps
- Low: Philippines -12bps
- Callout: Indonesia +11bps YTD
- 5YR CDS:
- Median: -1.1%
- High: Australia +10.4%
- Low: China -10.7%
- Callout: Japan -6.4% over the last month vs. a regional median decline of -2.4%
- 1YR O/S INTEREST RATE SWAPS:
- High: India, Thailand +3bps
- Low: China -17bps
- Callout: China -107bps over the last six months
- O/N INTERBANK RATES:
- High: Japan +1bps
- Low: India -30bps
- Callout: China -22bps wk/wk
- CORRELATION RISK: The Hedgeye Global Macro Volatility Index is inversely correlated to the MSCI All-Country Asia Pacific Equity Index to the tune of -64% over the past three years and the inverse correlation is even higher for Asian currencies (-83% over that same duration).