Daily Breakfast Spread, 17 September 2013

Economies, Currencies, Rates

Daily Breakfast Spread DBS Group Research

17 September 2013

Economics Greater China, Korea • HK: The seasonally-adjusted unemployment rate for August (3mma) is expected to remain flat at 3.3%. The unemployment rate has consistently stayed between 3.2% and 3.5% since July 2011 even though GDP growth has decelerated. In previous cycles, the unemployment rate rose after GDP growth fell.

US Fed expectations

Dec13 Jun14 Dec14 0.11 0.11 0.25

0.17 0.19 0.25

GDP growth used to be a fairly good predictor of the unemployment rate. However, this is no longer the case. As cyclical demand-side factors cannot fully explain labor market tightness, we suspect supply-side factors are in force. Some sectors face chronic labor shortages regardless of the state of the economy. Demographic changes could be one behind this. For instance, the percentage of male employees aged below 50 have now decreased to 65% from 77% back in 2005, and this may have caused labor shortages in some sectors requiring intensive manual work. Of course, this is just one possible reason.



More important is the realization that there are limits to conventional macroeconomic wisdom when analyzing Hong Kong’s labor market. Microeconomic factors are crucial to understanding hiring decisions and job seekers’ aspirations, particularly at the industry level. Thus, it is worth tapping into the brains of industry specialists, and one way to do it is to pay more attention to employment surveys. According to the latest Manpower Employment Outlook Survey, 18% of employers surveyed expected an increase in staffing levels in 3Q, with only 4% predicting a decrease. The results are consistent with the phenomenon that the labor market remained tight in spite of difficulties in the macroeconomic environment. All things considered, the unemployment rate is likely to stay between 3.3%-3.5% for the rest of the year.

Southeast Asia, India

Implied fed funds rate

Market Current 1wk ago DBS



0.36 0.44 0.25

Source: Bloomberg fed fund futures Notes: Given a FF target rate of 0.25%, an implied FF rate of 0.30 is interpreted roughly as the market pricing in a 20% chance of a Fed hike to 0.50% from 0.25% (30 is 1/5th of the distance to 50 from 25). DBS expectations are presented in discrete blocks of 25bps, i.e., the Fed moves or it does not. See also “Policy rate forecasts” below.

• MY: Inflationary pressure is building up. August CPI inflation due on Wednesday is expected to inch a tad higher to 2.1% YoY, up from 2.0% in the previous month. Though the increase is marginal, and more to do with transient festive season effect, the risk lies ahead. Fundamentally, the strong domestic growth, rising labour cost and rental will drive inflation higher in the coming months. More importantly, there’s the policy impact of the fuel subsidy cuts to contend with. A sharp spike up in inflation is expected in September given the hikes in pump prices.

The government cut both Ron 95 petrol and diesel subsidies by MYR 0.20 per litre earlier in the month. This will raise the pump prices for RON95 petrol to MYR 2.10/litre and diesel to MYR 2.00/litre after the hike, up from MYR 1.90 and MYR 1.80 respectively.



This latest move is expected to save about MYR 3.3bn per year as part of the crucial budget reforms. The federal government hope to bring fiscal deficit below 3% of GDP by 2015. But as it is, Malaysia spends MYR 24.8bn a year on fuel subsidies and the budget deficit is expected to exceed 4.5% of GDP this year due to massive pump-priming and a ballooning subsidy bill.



Expect a one off upward shift in the underlying cost structure of the economy, which will manifest mainly in next year’s inflation reading. We have raised our full year inflation forecast for next year to 3.0%, up from 2.4% previously while 2013 inflation has been revised marginally upward by 0.1%-pt to 2.1%.

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Daily Breakfast Spread, 17 September 2013



Although such policy change will have a temporary impact, the risk is on stoking inflation expectation. A policy change of such nature often runs the risk of inducing a second order inflationary pressure due to opportunistic pricing behaviour by suppliers as well as subsequently danger of wage-price spiral from higher wage demand by workers. Policymakers will have to stay vigilant in this regard.

• IN: Aug WPI inflation surpassed expectations to rise 6.1% YoY, up from 5.8% the month before. This takes the Apr-Aug to 5.2%. On seasonally adjusted basis, the index rose 1.0% MoM sa, hastening from the six month moving average of 0.6%. The movement of the underlying drivers stuck to script as food and fuel costs fed into the price pressures, while the manufacturing index stayed subdued (see accompanying chart).

The food price index, particuIN: Food, fuel drive underpin headline WPI larly, rose 18.1% (fastest in 2004-05=100, Index three years) on the back of a sharp 77.8% surge in vegeta250 bles and other perishables. 230 Apart from the inadequate supplies, part of these sharp 210 Latest : gains in the food component 190 Aug13 is also possibly a reflection of higher transport prices. True 170 to the word, the fuel index 150 rose by the fastest pace in nearly two years, as rupee de130 preciation and higher inter110 national crude benchmarks Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 pulled domestic counterparts WPI Food- Prim WPI Fuel WPI higher. In contrast, the pace of rise in the manufactured price index was the slowest since Oct09. These affirm observations from the monthly PMI price sub-components that even as input prices rise, manufacturers’ struggle to pass on the additional cost burden.



There are three main takeaways from the upside surprise in the WPI inflation data. Firstly, the notable spike in Aug WPI despite ongoing demand destruction highlights that supply-side constraints are back on the drivers’ seat. To this end, the economy might be trapped in a stagflationary-type environment, as growth is at the cusp of moving another leg lower while inflation bottoms out. Secondly, concern over the divergence in the movements in the retail inflation and WPI inflation could be revisited, as CPI inflation has stabilized around the 9.5% mark while WPI inflation rate has risen by more than 100bps in the past two months.



More crucially for this week, implications for policy are important to gauge. While monetary policy is a blunt tool to address cost-push bottlenecks, nonetheless the need to maintain price stability and anchor inflationary expectations could see the central bank err on the side of caution. In essence, the room to ease rates has evaporated and barring a sizeable scaling back in US asset purchases mid-week, the Repo is likely to be held unchanged. In addition, the upward revision in the backdated data (Jun’s up from 4.86% to 5.2%) signals that pipeline pressures were firmer than earlier anticipated.

G3 • US: Home sales plunged by 13.4% between June and July of this year; will housing starts plunge by the same amount in August? The timing might be a little too quick but the logic would certainly say so. The price of housing / mortgages goes up, demand for housing goes down, supply of housing follows shortly thereafter. The question is, how ‘shortly’ is thereafter? A month? That may be a bit quick. Builder sentiment has been on the rise and most people – not just builders – stick to their guns for a while. Two months? That sounds more likely. Perhaps that’s why markets still expect starts to rise a bit this month (to 920k, saar, from 896k in July).

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Daily Breakfast Spread, 17 September 2013



The thing is, housing starts have already come off a lot since March (chart below). Builders may already be wondering if they had gotten ahead of themselves. Yes, inventories are low – 4.7 months’ worth of current sales – but if sales drop, like they did ferociously in July, that ratio can pop back up pretty quickly. To the extent builders have become more cautious since March, the plunge in July sales isn’t going to bring higher August starts. Time will tell. US – housing starts x1000/mth, saar, 3mma 1100

20% saar growth path

1000 900 800

Lehman collapse

700 600 500 400 Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

What is clear already is that higher interest rates and the impact they appear to be having on housing is the key risk to the outlook at the moment. Housing has been a big supporter of growth over the past two years. In the past year alone, it has accounted for 25% of all GDP growth. The drop in July, however, wiped one-third of the two year recovery in home sales right off the map. If that fall gets transmitted to starts/construction, GDP growth drops back below 1% (saar). And the Fed is back at Square One. Markets? Plainly, they would see the pickle the Fed was in – can’t live with QE, can’t live without it – and, like everyone else, wonder what the heck comes next.

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Daily Breakfast Spread, 17 September 2013

Economic calendar Event Sep 16 (Mon) IN: WPI (Aug) EZ: CPI (Aug F) US: Empire Manufacturing (Sep) US: IP (Aug) US: Capacity utilisation (Aug) Sep 17(Tue) SG: NODX (Aug) HK: unemployment rate (Aug, sa) EZ: Current account (Jul, sa) US: CPI (Aug) US: NAHB Housing market index (Sep) Sep 18 (Wed) MY: CPI (Aug) US: Mortgage applications (Sep13) US: Housing starts (Aug)

Consensus

Actual

Previous

5.7% y/y

6.1% y/y 1.3% y/y 6.29 0.4% m/m 77.8%

5.79% y/y 1.6% y/y 8.24 0.0% m/m 77.6%

9.10 0.5% m/m 77.9% 2.4% y/y 3.3%

-0.7% y/y 3.3% EUR 16.9bn 2.0% y/y 59

1.6% y/y 58 2.0% y/y 920K

2.0% y/y -13.5% 896K

Sep 19 (Thur) JP: trade balance (Aug) exports imports US: Initial jobless claims (Sep 13) US: Existing home sales (Aug)

-JPY 1126.5bn 14.5% y/y 18.5% y/y 330K 5.25M

-JPY 1027.9bn 12.2% y/y 19.6% y/y 292K 5.39M

Sep 20 (Fri) EZ: Consumer confidence (Sep A)

-14.5

-15.6

Central bank policy calendar Date Country This week 19-Sep US 20-Sep IN

Policy Rate

Current

Consensus

DBS

FDTR o/n repo

0.25% 7.25%

0.25% 7.25%

0.25% 7.25%

Next week 26-Sep TW

disc rate

1.875%

Last week 12-Sep KR 12-Sep PH 12-Sep ID

7 day repo rate o/n rev repo o/n reference rate

2.50% 3.50% 7.00%

2.50% 3.50% 7.00%

2.50% 3.50% 7.00%

Actual

2.50% 3.50% 7.25%

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Daily Breakfast Spread, 17 September 2013

GDP & inflation forecasts GDP growth, % YoY

CPI inflation, % YoY

2010

2011

2012

2013f

2014f

2010

2011

2012

2013f

2014f

US Japan Eurozone

2.5 4.5 1.9

1.8 -0.6 1.6

2.8 2.0 -0.5

1.4 1.8 -0.4

2.1 0.9 0.5

1.6 -0.7 1.6

3.1 -0.3 2.7

2.1 0.0 2.5

1.6 0.3 1.5

2.0 2.4 1.4

Indonesia Malaysia Philippines Singapore Thailand Vietnam

6.1 7.2 7.3 14.8 7.8 6.8

6.5 5.1 3.6 5.2 0.1 5.9

6.2 5.6 6.8 1.3 6.4 5.0

5.8 4.3 7.0 2.9 4.0 5.3

6.0 5.2 6.7 3.5 5.2 5.7

5.1 1.7 3.8 2.8 3.3 9.2

5.4 3.2 4.8 5.2 3.8 18.6

4.3 1.7 3.1 4.6 3.0 9.3

7.4 2.1 3.1 2.5 2.4 6.7

7.3 3.0 4.0 3.2 3.5 6.8

China Hong Kong Taiwan Korea

10.3 7.0 10.7 6.2

9.3 4.9 4.1 3.6

7.8 1.5 1.3 2.0

7.5 3.5 2.6 2.8

7.5 4.0 3.3 3.5

3.3 2.4 1.0 2.9

5.4 5.3 1.4 4.0

2.6 4.1 1.9 2.2

3.5 4.5 0.8 1.3

3.5 3.5 1.1 2.8

India*

8.4

6.5

5.0

4.3

5.0

9.6

8.9

7.4

6.1

6.8

* India data & forecasts refer to fiscal years beginning April; inflation is WPI Source: CEIC and DBS Research

Policy & exchange rate forecasts Policy interest rates, eop

Exchange rates, eop

current

4Q13

1Q14

2Q14

3Q14

current

4Q13

1Q14

2Q14

3Q14

US Japan Eurozone

0.25 0.10 0.50

0.25 0.10 0.50

0.25 0.10 0.50

0.25 0.10 0.50

0.25 0.10 0.50

… 99.1 1.334

… 102 1.32

… 103 1.33

… 104 1.34

… 106 1.35

Indonesia Malaysia Philippines Singapore Thailand Vietnam^

7.25 3.00 3.50 n.a. 2.50 7.00

7.00 3.00 3.50 n.a. 2.50 7.00

7.00 3.00 3.50 n.a. 2.50 7.00

7.00 3.00 3.75 n.a. 2.75 7.00

7.00 3.00 4.00 n.a. 3.00 7.00

11,380 3.25 43.6 1.26 31.8 21,125

11,150 3.31 44.0 1.25 32.2 21,310

11,200 3.29 43.8 1.23 32.1 21,340

11,250 3.28 43.6 1.22 32.0 21,380

11,300 3.26 43.4 1.21 31.9 21,410

China* Hong Kong Taiwan Korea

6.00 n.a. 1.88 2.50

6.25 n.a. 1.88 2.50

6.25 n.a. 1.88 2.50

6.50 n.a. 2.00 2.75

6.50 n.a. 2.13 2.75

6.12 7.75 29.7 1084

6.09 7.76 29.5 1075

6.06 7.76 29.4 1070

6.03 7.76 29.3 1065

6.00 7.76 29.2 1060

India

7.25

7.25

7.25

7.25

7.25

62.8

64.1

64.4

64.8

65.1

^ prime rate; * 1-yr lending rate

Market prices Policy rate Current (%) US Japan Eurozone

10Y bond yield Current 1wk chg (%) (bps)

FX Current

1wk chg (%)

Index

Equities Current

1wk chg (%)

0.25 0.10 0.50

2.85 0.72 1.94

-6 -3 -2

81.3 99.1 1.334

-0.6 1.3 0.5

S&P 500 Topix Eurostoxx

1,698 1,185 2,794

1.5 3.3 2.2

Indonesia Malaysia Philippines Singapore Thailand

7.25 3.00 3.50 Ccy policy 2.50

8.03 3.77 3.75 2.47 4.31

-78 -16 -3 -20 -5

11380 3.25 43.6 1.262 31.8

0.0 1.3 1.4 0.5 1.1

JCI KLCI PCI FSSTI SET

4,522 1,771 6,303 3,179 1,445

7.9 2.7 5.1 3.0 4.4

China Hong Kong Taiwan Korea

6.00 Ccy policy 1.88 2.50

… 2.21 1.71 3.50

… -28 171 -9

6.12 7.75 29.7 1085

0.0 0.0 0.3 0.2

S'hai Comp HSI TWSE Kospi

2,231 23,252 8,255 2,013

0.9 2.2 0.6 2.0

8.44

-4

62.8

3.8

Sensex

19,742

2.5

India Source: Bloomberg

7.25

5

Daily Breakfast Spread, 17 September 2013

Contributors: Economics David Carbon Irvin Seah Tieying Ma Radhika Rao Eugene Leow Chris Leung

Singapore Singapore Singapore Singapore Singapore Hong Kong

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6878 9548 6878 6727 6878 2408 6878 5282 6878 2842 3668 5694

Currencies / Fixed Income Philip Wee Nathan Chow

Singapore Hong Kong

(65) 6878 4033 (852) 3668 5693

Administrative support Violet Lee

Singapore

(65) 6878 5281

Please direct distribution queries to Violet Lee on 65-6878-5281

Client Contacts Singapore DBS Bank DBS Nominees (Pte) Ltd DBS Vickers Securities The Islamic Bank of Asia

Korea (65) (65) (65) (65)

6878 8888 6878 8888 6533 9688 6878 5522

DBS Beijing (86 10) DBS Dongguan (86 769) DBS Guangzhou (86 20) DBS Hangzhou (86 571)

5752 9000 2339 2000 3818 0888 8113 3188

DBS Shanghai DBS Shenzhen DBS Suzhou DBS Tianjin

3896 8888 8269 0880 8888 1088 5896 5388

China

(86 21) (86 755) (86 512) (86 22)

Hong Kong DBS Hong Kong DBS Asia Capital

(852) 3668 0808 (852) 3668 1148

(91 44) 6656 8888 (91 11) 3041 8888 (91 22) 6638 8888

(62 21) 390 3366/8 (62 61) 3000 8999 (62 21) 531 9661

Japan DBS Tokyo

339 2660

DBS Kuala Lumpur DBS Labuan Hwang-DBS Penang

(6 03) 2148 8338 (6 08) 595 500 (6 04) 263 6996

Philippines DBS Manila

(63 2)

845 5112

Taiwan DBS Changhua DBS Kaohsiung DBS Taichung DBS Tainan DBS Taipei DBS Taoyuan

(886 4) 700 2101 (886 7) 965 5700 (886 4) 3606 6166 (886 6) 601 7200 (886 2) 6612 9888 (886 3) 264 7100

Thailand (66 2)

660 3781

United Kingdom DBS London

(44 20) 7489 6550

UAE

Indonesia DBS Jakarta DBS Medan DBS Surabaya

(82 2)

Malaysia

DBS Bangkok

India DBS Chennai DBS New Delhi DBS Mumbai

DBS Seoul

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DBS Dubai

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USA DBS Los Angeles

(1 213)

627 0222

DBS Hanoi Rep Office (844) Ho Chi Minh City (84 8)

3946 1688 3914 7888

Vietnam

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Daily Breakfast Spread, 17 September 2013

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