2016 macroeconomic outlook: 1 April 2016

Selena Ling

Treasury Research & Strategy

OCBC Bank

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Global

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-8.9%

-3.1%

-1.4%

-0.1%

0.1%

-10.0% -9.0% -8.0% -7.0% -6.0% -5.0% -4.0% -3.0% -2.0% -1.0% 0.0% 1.0%

S&P 500, 9/11 2001

IBEX 35, Madrid bombings 2004

FTSE 100, London attacks 2005

CAC-40, Paris attacks 2015

BEL 20, Brussels 2016

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• Immediately after the attack, major airline and hotel stocks in European markets fell

by more than 4%, while the Stoxx Europe 600 index declined by 0.7%, albeit

recovering the next day. Meanwhile, safe haven assets such as German bonds,

U.S. Treasuries, JPY and gold saw upside movements.

• Ever since 9/11, markets have been showing more resilience to terror attacks. The

Belgian stock index, BEL 20, has recovered since, indicating investor resilience and

the belief that such an attack would not devastate the economic fundamentals.

Brussels – “keep calm and carry on”

Source: Bloomberg, OCBC

Note: the movements of aforementioned indices reflect the change between the attack and the next trading day close

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• Among major currencies, GBP saw the biggest slide as the attack at Brussels

triggered another round of “Brexit” support, this time with former HSBC chief

Geoghegan in the “pro- Brexit” camp.

• The Brexit referendum due on 23rd June. The latest ICM poll showed that 41% of

respondents stood in the “pro-EU” camp while 43% continue to support an

independent UK.

“Brexit” remains as the biggest uncertainty in EU

Source: Bloomberg, ICM Poll

1.415

1.42

1.425

1.43

1.435

1.44

1.445

14:00 15:40 17:20 19:00 20:40 22:20

GBPUSD Movement amid the attack

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• FOMC had revised down its expected number of rate hikes in 2016 from 4 to 2, at

March’s FOMC meeting, citing uncertainties in global economies, amongst others.

• While some Fed officials have since then started to appear relatively more hawkish,

to emphasize an uptick in inflationary factors, Chairwoman Janet Yellen has been

rather steadfast in telegraphing a gradual and careful approach in hiking rates. Our

house view is for 2 rate hikes this year, with the earliest likely only in June.

Dovish Fed credentials: U-turn in March

Source: Bloomberg, OCBC.

FOMC: March central tendency forecasts

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Source: FOMC

FOMC: lower median dots graph

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Source: FOMC

ECB easing bias: Draghi’s bazooka on 10 March

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• Bazooka on 10 March comprised of:

• Main refinancing interest rate to be cut from 0.5% to 0% (unexpected).

• Marginal lending facility on overnight credit interest rates will be cut by 5bps to

0.25% (unexpected).

• Deposit interest rate by commercial banks to the ECB will be cut by 10bps to -

0.4% (expected).

• Monthly QE purchase program will be hiked by EUR20b to EUR80b (larger-than-

expected) and to include investment-grade EUR-denominated corporate bonds.

• New 4 Targeted Longer-Term Refinancing Operations (TLTRO) with a maturity of

four years starting from June 2016 (somewhat expected)

ECB: Draghi’s mike drop

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• The ECB also cut their economic forecasts:

• GDP growth: 1.4% (2016) and 1.7% (2017), and CPI to 0.1% (2016), down from

1% in Dec, followed by 1.3% (2017) and 1.6% (2018), which is below the 2%

inflation target out to 2018.

• However, this failed to cap the Euro’s advance.

• Policy conundrum: ECB’s Draghi flagged that “monetary policy has been really

the only policy driving the recovery in the last few years”.

Source: Bloomberg, OCBC

What’s next after the risk-rally?

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• Equity market valuations are becoming less attractive after the rally. Forward PE

ratios have risen sharply from mid-January lows and are now well above decade

average levels even for EM.

• EM’s 1Q16 bond issuance has picked up from 2H15, with a number of EM

sovereigns and corporates tapping the Eurobond market.

China:

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China: A weak start in 1Q 2016

• China kicked off 2016 with a weak start. Industrial production disappointed in the

first two months due to persistent pressure for de-capacity. The only bright spot is

real estate investment, which grew by 3% after falling for five months, due to recent

booming property market in particular in tier-1 and some tier-2 cities. However, the

rebound of real estate investment may not be sustainable due to high inventory in

lower tier cities. The 1Q GDP growth is expected to slow further to around 6.7%

yoy.

Source: CEIC, Bloomberg, OCBC

0

5

10

15

20

25

Feb

-07

Au

g-0

7

Feb

-08

Au

g-0

8

Feb

-09

Au

g-0

9

Feb

-10

Au

g-1

0

Feb

-11

Au

g-1

1

Feb

-12

Au

g-1

2

Feb

-13

Au

g-1

3

Feb

-14

Au

g-1

4

Feb

-15

Au

g-1

5

Feb

-16

China Industrial Production

0%

5%

10%

15%

20%

25%

30%

35%

40%

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Fixed investment Real estate investment

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China: limited impact of poor export data on Yuan

• February exports fell by 25.4% yoy. Exports to ASEAN and G3 fell by 33.4% and

21.3% respectively. The broad based contraction signals the weak global

recovery. However, the impact on RMB may be limited as China’s export

continued to gain global shares despite contraction. As such, we think China is

unlikely to devalue RMB to support export growth.

Source: CEIC, Bloomberg, OCBC

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Jan

-14

Mar

-14

May

-14

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Mar

-15

May

-15

Jul-

15

Sep

-15

No

v-1

5

Jan

-16

China's exports to G3 12m rolling

China's export to ASEAN 12m rolling

0%

2%

4%

6%

8%

10%

12%

14%

16%

Jan

-06

Au

g-0

6

Mar

-07

Oct

-07

May

-08

De

c-0

8

Jul-

09

Feb

-10

Sep

-10

Ap

r-1

1

No

v-1

1

Jun

-12

Jan

-13

Au

g-1

3

Mar

-14

Oct

-14

May

-15

De

c-1

5

China's export as % of total world export

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RMB Index has played a more important role

• Despite RMB strengthened against the dollar in the past few weeks, RMB has

weakened against its basket currency. The reference to basket currency has led to

higher volatility of USDCNY fixing.

• The RMB index has tested low of 98 for the past few days, we expect the index to

find the support at 98 but the risk of index to break below 98 cannot be ruled out.

Source: CEIC, Bloomberg, OCBC

USDCNY fixing RMB Index

09/03/2016 6.5106 99.10

10/03/2016 6.5127 99.00

11/03/2016 6.4905 98.82

14/03/2016 6.4913 98.73

15/03/2016 6.5079 98.78

16/03/2016 6.5172 98.71

17/03/2016 6.4961 98.32

18/03/2016 6.4628 98.04

21/03/2016 6.4824 98.08

22/03/2016 6.4971 98.06

6.25

6.3

6.35

6.4

6.45

6.5

6.55

6.6

95.00

96.00

97.00

98.00

99.00

100.00

101.00

102.00

103.00

104.00

27/11/2015 27/12/2015 27/01/2016 27/02/2016

CFETS INDEX CNYMUSD

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China: measures to support/smoothen markets

Source: CEIC, Bloomberg, OCBC

0

1000

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4000

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0

500

1000

1500

2000

2500

2-J

an

-14

2-M

ar-

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2-M

ay

-14

2-J

ul-

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2-S

ep

-14

2-N

ov-1

4

2-J

an

-15

2-M

ar-

15

2-M

ay

-15

2-J

ul-

15

2-S

ep

-15

2-N

ov-1

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2-J

an

-16

2-M

ar-

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Outstanding of margin trading Shanghai Index

FX market Equity market Banking sector

• Zero interest 20% margin requirement for long dollar forward position in Sep15.

• PBoC suspended some foreign banks from conducting some cross border RMB business in December 2015 after the additional commission charge imposed failed to deter cross border arbitrage.

• Tobin tax to curb speculation?

• Increase share of equity capital financing in national savings.

• CSFC to restart margin lending to securities companies (182 days@3%).

• Chinese banks to relaunch pledged financing.

• Caixin reported that loan loss provision coverage ratios may be lowered for 7 major banks in China from the current 150% coverage ratio requirement. Minimum provision coverage ratio at ABC, CCB, BOC could be cut to 130%, while the ratio at ICBC, Bank of Communications, China Merchants Bank and Industrial Bank could be lowered to 140%.

Indonesia:

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• At 5.04%yoy, the Q4 2015 GDP print was better than 4.8% expected and proved

to be the best expansion rate since early 2014. A steady private consumption

helps, but it was ultimately the government spending that offered the big pull.

• The pick-up in growth momentum validates the government’s renewed reform

spurt late last year. Focus on infrastructure, red tape cuts, and overall macro

stability will remain crucial this year.

Indonesia’s GDP growth:

Source: Bloomberg, OCBC

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• Progress in infrastructure development will be most keenly watched by the market,

Indicators such as cement sales are showing nascent signs of a pick-up.

• Bank Indonesia has cut rate by 25bps for the third time to 6.75% in March

(cumulative -75bps) amid a relatively tame inflation outlook and currency stability.

• Going forward, however, even as we think there would be another 25bps cut, it is

unlikely to come hot on the heels in the next few months, as BI would likely hold

back to gauge whether the policy rate cuts will be passed on via the banking sector.

Indonesia: infrastructure pick-up

Source: Bloomberg, OCBC

Malaysia:

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• Malaysia reported February inflation rate of 4.2% yoy, higher than market

expectation of 4.1% and 3.5% of the previous month.

• An uptick in food prices looks to be the primary culprit, apart from base effect.

• Overall, while inflation may start to turn south from here, as the effect of April 2015

GST implementation starts to peter out in year-on-year terms, it is unlikely to be

tame enough for BNM to look at cutting rate just yet.

Malaysia: inflation uptick

Source: Bloomberg, OCBC

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• MYR has stabilized in recent weeks, and has indeed broken back below 4.0 level

against the greenback.

• While broad USD weakness, courtesy of dovish Yellen, has helped, there are also

some other positive factors at play, including a rebound in oil price.

• On top of that, fund flows appear to be (finally) working in favor of Malaysia in

recent weeks.

Malaysia: much needed stability

Source: Bloomberg, EPFR, OCBC

Singapore:

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Manufacturing slump: technical recession risk?

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Source: OCBC

• Manufacturing production fell 2.3% yoy in Jan-Feb, worse than -0.6% yoy last year.

• The main culprits were electronics, transport and precision engineering.

• However, biomedical cluster rose for the second consecutive month. Chemicals

also improved as stronger specialty and other chemicals offset weakness in

petroleum and petrochemicals.

• We downgrade our 1Q16 GDP growth forecast to 2.2% yoy (+2.5% qoq saar) due

to weaker manufacturing performance (forecast: -2.1% yoy).

Growth GDP yoy

Qoq saar

Manufacturing

Construction

Services

1Q16 2.2% 2.5% -2.1% 2.5% 3.4%

2Q16 1.9% -3.2% -2.8% 2.2% 3.2%

3Q16 1.7% 0.9% -3.1% 1.9% 2.9%

4Q16 1.8% 7.4% -2.0% 1.5% 2.6%

2016 2.0% - -2.5% 2.0% 3.0%

S’pore: Inflation and productivity picture

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Source: CEIC, OCBC

• Headline inflation fell for the 16th straight month by 0.8% yoy (-0.1% mom nsa), the

lowest yoy print since Nov15, due to the drag from housing & utilities and private

road transport. However, core inflation accelerated to +0.5% yoy in Feb amid higher

food prices. Services inflation has been relatively stable. Wages may rise at a more

moderate pace than 2015 with a limited pass-through to consumer prices. Our 2016

headline and core inflation forecasts remain at -0.4% yoy and +1.0% yoy.

• Labor productivity growth remains lacklustre.

S’pore: MAS professional forecasters survey

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• 2016 consensus growth forecast has been

cut from 2.2% to 1.9%, with manufacturing

and finance & insurance tipped at a slower

pace, albeit private consumption should still

be resilient.

Source: MAS Professional Forecasters Survey

MAS professional forecasters survey: continued

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Source: MAS Professional Forecasters Survey

• Headline and core CPI are tipped at -0.2% and +0.8%m down from +0.5% and +0.8%

previously.

A fiscally prudent FY16 Budget:

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• FY15 deficit of $4.88b will return to a planned $3.45b surplus in FY16. While total

expenditure rose 7.3% to $73.43 billion, operating revenue is projected to only rise

6.7% to $68.44b. Focus is $4.5b Industry Transformation Package targeting SMEs.

•Special transfer moderates 40.5% from $10.54b in FY15 to $6.27b in FY16, whereas

NIRC surges 48.5% to $14.7b in the same period.

Unusual

Singapore Budget Statistics

S$ bn FY 2014 FY2015 FY2016

Actual Actual Forecast Operating Revenue 60.84 64.16 68.45

Total Expenditure 56.65 68.41 73.43

Operating Expenditure 42.69 48.73 54.43

Development Expenditure 13.96 19.68 19.00

Primary Budget Balance** 4.19 -4.25 -4.98

% of GDP 1.07% -1.05% -1.21%

Less: Special Transfers 12.36 10.54 6.27

Add: NII Contribution 8.74 9.90 14.70

Overall Budget Balance 0.57 -4.88 3.45

% of GDP 0.1% -1.2% 0.8%

Source: Ministry of Finance

* Figures may not add up due to rounding;

** Surplus/Deficit before Special Transfers and Net Investment Income (NII) Contribution

S’pore: April monetary policy review status quo?

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• Sluggish 2016 GDP growth at 2% yoy, with negative headline inflation but steady

core inflation. Policymakers are watchful but not in panic mode.

• Near-term prospects remain challenging. A technical recession remains possible.

Source: OCBC

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• Fed lowers median dots graph to two rate hikes this year, but market is sceptical.

• Central banks continue to push on a string (ECB & BOJ). Many point to need for

fiscal stimulus and structural reform to step up.

• China cut its 2016 growth target to 6.5-7%, but need to at least 6.5% average

growth for next 5 years to double GDP per capita between 2010-2020.

• Risk-off in January-February, but Emerging Markets bounce back in March.

What lies ahead?

• Brexit remains a concern for financial markets.

• China-centric risks, revolving around financial, housing and capital outflows.

• EM policymakers continue to be opportunistic on finding policy space.

• Crude oil price recovery potentially remains a double-edged sword.

• Expect calibrated policy support for the Singapore economy.

Key conclusions:

Thank You

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