The Economic Data calendar for the week of the 18th of November through the 22nd is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
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This note was originally published November 15, 2013 at 07:39 in Daily Trading Ranges
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Takeaway: We profile Indonesia’s recent hardship as further supporting evidence of our #EmergingOutflows and #AsianContagion theses.
This note was originally published August 19, 2013 at 12:07 in Macro
It’s been a long 3-4 months for investors operating in EM capital and currency markets. Since we outlined our structural bearish bias on Emerging Markets in our 4/23 presentation titled: “EMERGING MARKET CRISES: IDENTIFYING, CONTEXTUALIZING AND NAVIGATING KEY RISKS IN THE NEXT CYCLE”, the MSCI EM Index has fallen -5.1%; the JPM EM FX Index has fallen -5.8%; the JPM EM USD Bond Index (EMB) has fallen -11.3%; and the Market Vectors EM Local Currency Index (EMLC) has fallen -13.4%.
It’s been an especially long ~3M for investors operating in Indonesian capital and currency markets:
While the flows have certainly punished Indonesia simply for being an emerging market in 2013, we’d argue that the country’s own “fundamental misbehavior” has contributed to the aforementioned underperformance:
Indonesia’s most recently reported real GDP growth rate of +5.8% YoY (2Q13) was the slowest rate since 3Q10 and -1.5x standard deviations below the trailing 3Y mean. On this number, Bank Indonesia (the country’s central bank) revised down its 2013 GDP forecast to “the lower end” of its [new] +5.8% to +6.2% forecast range; prior to that, they had been expecting 2013 growth to come in at +6.6%.
This weekend, we received far worse news on the economic growth front: the current account deficit widened to a nominal record $9.8B in 2Q13; as a percentage of GDP, the current account deficit widened to 4.4% in 2Q13, which is also a record. In the context of capital outflows, the country will have an increasingly difficult time maintaining existing growth rates by plugging this savings/investment imbalance with outside capital. To the extent the country fails to do so, at the margins, economic growth will continue to slow.
Not ironically, Indonesia scored rather poorly (5th worst out of 29 countries) on our BOP/Currency Crisis Index, which was one of the “Four Pillars” in our EM Crisis Risk Model, so today’s current account deficit-induced issues Indonesia is experiencing across its capital and currency markets (Jakarta Composite Index tanked -5.6% DoD, while the IDR also plunged -1.9% DoD vs. the USD) comes as no surprise to us.
The country’s CPI rate hit a ~4.5Y-high in JUL, accelerating to +8.6% YoY from a reading of +5.9% YoY in the prior month. While currency weakness (IDR down -9.6% YoY vs. the USD) has definitely played a major factor in the recent ramp in reported inflation readings in Indonesia, President Susilo Bambang Yudhoyono raised domestic fuel prices for the first time since 2008 in JUN to help curb rampant fuel subsidy costs that is eroding the fiscal balance (more on this below).
We bold the word “help” in the previous sentence because, in reality, the recent fuel price hike is doing little to allay the aforementioned fiscal concerns: next year’s budget allocates 336.2 trillion rupiah ($32 billion) for total subsidies, which is little changed from the 346.4 trillion rupiah spent in the current fiscal year.
FISCAL AND MONETARY POLICY TIGHTENING
In the face of rampant inflation, Bank Indonesia has hiked interest rates by +75bps in the YTD, with 50bps of that tightening coming in the past two months alone (inclusive of the fuel price hike news). On Thursday, Bank Indonesia increased the country’s secondary reserve requirement ratio by +150bps to 4%.
Interestingly, there exists a divergence in the on-shore swaps market and the local currency sovereign debt market as it relates to the likelihood of further tightening over the NTM: 1Y OIS contracts are trading at a -140bps discount to the 6.5% benchmark reference rate; the 1Y sovereign debt yields are trading at a +63bps premium to the same rate.
We should expect to see this kind of confusion when in an environment of Growth Slowing as Inflation Accelerates. Also confused, it should be noted that Bank Indonesia held rates in its most recent meeting, opting for additional time to reassess the balance of risks facing the country’s beleaguered economy.
As it relates to Indonesia’s fiscal policy outlook, we’ll know more details later in the week when we receive the official 2014 budget outline. For now, investors can be assured of some meaningful degree of tightening, as the budget is expected to shrink the deficit/GDP ratio to 1.49% from a projected deficit equivalent to 2.4% of GDP in the current year.
All told, the Indonesian economy and its policymakers have not done themselves any favors as it relates to protecting investors from price declines consistent with our top-down #EmergingOutflows and #AsianContagion theses. The bottom-up GROWTH/INFLATION/POLICY fundamentals in Indonesia continue to deteriorate at the margins and that alone should continue to keep “the flows” from being supportive of Indonesian assets.
Takeaway: The proverbial waterfall of fund flows continues out of this epic Bernanke Bond Bubble.
I had to sell that long Treasuries position. I couldn’t gut it out past the 11am EST portion of Yellen's chat yesterday.
The proverbial waterfall of fund flows continues out of this epic Bernanke Bond Bubble. There will be nothing “tight” about timing that – it happens slowly, then all at once (h/t Ernest Hemingway).
The 10-year Yield is holding its 2.64% TREND support. More to be revealed.
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