Friday

March 17, 2017

  March 17, 2017

 

G-20 Finance Ministers Meet, Singapore Export DataBy Colin Simpson and Ben Baris

What to Watch: The finance ministers and central bankers begin a two-Group of 20day meeting in Baden-Baden, Germany that will focus on the Trump administration’s challenge to free trade, global exchange rates, and promoting growth in Africa. Thefinance chiefs will be looking to U.S. Treasury Secretary Steven Mnuchin to expand on his country’s priorities.

Economics: ANZ updates its consumer confidence index for March at New Zealand8 a.m. releases February exports data, with analysts surveyed by SingaporeBloomberg forecasting a 12.5 percent year-on-year increase in the non-oil category compared with January's 8.6 percent (see chart below), 8:30 a.m. Electronics exports are expected to rise by 11 percent, up from 8.6 percent previously. reports on Thailandforeign reserves and forward contracts, 3:30 p.m., and the Monetary Hong KongAuthority announces its composite interest rate decision.

Companies: are due from China Shenhua Energy, Shanghai Earnings reportsElectric, CSC Financial and Kerry Properties.          

Markets: slipped 0.2 percent Thursday, while the The S&P 500 Stoxx Europe 600 climbed 0.7 percent. The lost 0.2 percent after its 1.3 Bloomberg Dollar Spot Indexpercent post-FOMC drop and the dropped by 0.1 percent to $1.0727. The yield on euro10-year rose four basis points to 2.53 percent. Treasuries West Texas Intermediateslipped 11 cents to settle at $48.75 a barrel and fell 7 cents to close at $51.74.Brent

(All times local for Hong Kong.)    

View a live version of this chart on the .terminal

Quote of the Day

"There is no need for the BOJ to make a move now. The global economy is picking up and Japanese are exportsrebounding, signaling Japan’s economy is on the rise."  

— Yoshimasa Maruyama, chief market

economist at SMBC Nikko Securities Inc.

Commentary

Tightening by Janet Yellen’s Federal Reserve puts the People’s Bank of China’s Zhou Xiaochuan in a difficultposition: .Tom Orlik

Australian companies shed in February jobsand the unemployment rate jumped by 0.2 percentage point — but the deterioration was concentrated in part-time work:  

.Tamara Henderson

The Bank of Japan remained on at its holdMarch meeting, keeping its yield-curve control policy and pace of asset purchases unchanged: .  Yuki Masujima

Bank Indonesia has its focus shiftedto keeping inflation on target and signaled a readiness to adjust policy accordingly: Tamara Henderson.

Geopolitics

U.S. Secretary of State Rex Tillerson said that has nothing to North Koreafear from the U.S. or its allies in the region while for a new callingapproach to efforts to dismantle the nation’s nuclear program.

China

North Asia Trade Signals Positive for Singapore Exports

Singapore's exports may have remained strong in February, following growth of 8.6 percent year on year in January. Shipments of petrochemicals and electronics to China boosted performance in January, offsetting a decline for pharmaceuticals. Trade signals from North Asia have been positive. China's imports in dollars jumped 38.1 percent year on year in February from 16.7 percent in January. South Korea's exports rose 20.2 percent in February, nearly double January's pace. Taiwan's exports also accelerated sharply. Some caution is needed in interpreting the data though, given seasonal effects from the Lunar New Year holidays.

— Tamara Henderson, BI Economist

  Economics Asia 2  March 17, 2017

 China

Where Yellen Goes, Zhou Follows — at Least HalfwayBy Tom Orlik and Fielding Chen, BI Economists    Tightening by Janet Yellen’s Federal Reserve puts the People’s Bank of China’s Zhou Xiaochuan in a difficult position.The PBOC could follow the Fed’s 25-basis-point hike with its own move on benchmark rates. That would lean against yuan weakness and capital outflows, but risk stymieing the recovery and crystallizing financial risks.

Alternatively, the PBOC could stay on hold — risking a yuan drop and renewed capital flight. The solution: a typical Chinese compromise (and one that makes a lot of sense). The PBOC has left benchmark rates on hold but used targeted instruments to guide market rates higher.

The PBOC yesterday raised rates on its reverse repos by 10 basis points, taking the seven-day rate to 2.45 percent from 2.35 percent, the 14-day rate to 2.6 percent from 2.5 percent, and the 28-day rate to 2.75 percent from 2.65 percent. The one-year rate on the Medium-term Lending Facility was raised to 3.2 percent from 3.1 percent.

Taken together with a similar 10 basis point move in February, the PBOC has raised rates by a total of 20 basis points, within spitting distance of the Fed’s 25-basis-point move. Market rates have responded, with the seven-day repo rate trending gradually higher in the opening months of the year.

Fed hikes represent a threat to the hard-won equilibrium in China’s policy position. After a year and a half of market panics, capital outflows, sliding growth and falling prices, China has finally restored a measure of stability. Markets are calm, FXreserves are stable, growth is up, and the factory sector is reflating. Three Fed hikes in 2017, even if Yellen is careful to wrap that in reassuringly dovish language, could upset the balance.

A narrowing U.S.-China interest rate differential would put the yuan back on a downward path and risk a re-acceleration of capital outflows. Worse, if the U.S. follows through on tariff threats, China might miss the benefits of higher exports that usually come with a stronger U.S. economy.

As Bloomberg Intelligence Economics

 View a live version of this chart on the .terminal

has argued, incremental moves to guide market rates higher are part of an aggressive muddling-through strategy which represents the least-bad PBOC response to that challenge:

Raising benchmark rates would check depreciation pressure on the yuan, lean against burgeoning factory gate price increases, and help reduce leverage. The downside: stress on highly indebted corporates and local governments would be intense. Rate hikes could also be ill-timed if, as expected, property, autos and exports start to drag on growth.

Floating the yuan would be a decisive step toward market reforms. It would also almost certainly mean a weaker yuan — supporting exports. The risk, and it’s a big one: the transition from the current managed regime could be traumatic, witha sharp yuan drop and significant capital outflows. China’s policy makers are unlikely to roll the dice on that possibility, especially in a politically significant year.

That leaves option three: aggressive muddling through. That includes using targeted instruments to guide market rates higher, expending foreign exchange reserves to lean against yuan depreciation, and ratcheting up controls on capital outflows. The central bank is already working all three channels, with Thursday’s move the latest step on guiding market rates.

A big question going forward is whether the current targeted moves could pavethe way for an increase in benchmark rates. BI Economics’ current answer is no. A move on benchmark rates — which would trigger a repricing of loans across the economy — would add significant stress to highly leveraged corporate and local government borrowers. Given a debt-to-GDP ratio of about 260 percent, every 25 basis-point move on benchmark rates adds debt-servicing costs equal to 0.65 percent of GDP.

Benchmark moves also send a powerful tightening signal, which the PBOC is very likely keen to avoid. In a statement accompanying Thursday’s move they warned against over-interpreting the significance.

All of that said, if growth remains strong and higher producer prices pass through into a sustained increase in the consumer price index, a move on benchmark rates could start to come into view.

BI Economics’ view is that the PBOC’s new characterization of monetary policy as ‘neutral’ leaves the possibility of rate increases open, on the argument that higher inflation requires higher nominal rates in order to leave real rates in a neutral position. In that context, it’s noteworthy that real loan rates are at a multi-decade low.

Japan

PBOC and Market Rates

  Economics Asia 3  March 17, 2017

Japan

BOJ Stays on Hold as Fed, PBOC Add to ChallengesBy Yuki Masujima, BI Economist    The Bank of Japan remained on hold at its March meeting, keeping its yield-curve control policy and pace of asset purchases unchanged as expected. In Bloomberg Intelligence Economics’ view, it’s likely to keep its policy settings unchanged in the near term. There’s little reason to alter course now: the economy is picking up, core inflation has turned positive and growth in major markets is holding up. The BOJ statement was, on balance, neutral — a more downbeat view on housing was offset by less caution on corporate sentiment.

The big challenge for the BOJ will be to keep the 10-year Japanese government bond yield in line with its target around 0 percent, as inflation picks up, the Federal Reserve hikes interest rates and China’s central bank nudges its own market rates upward. And there’s always the risk that political events in Europe or an upset in the U.S. economy lead to a stronger yen. It’s the latter risk that would put the BOJ back on guard.

The BOJ’s next move appears most likely to be a tapering of JGB or exchange-traded fund purchases, but not until inflation shows a sustained upward trend, in BI Economics’ view. One source of uncertainty on the horizon: the terms of Takahide Kiuchi and Takehiro Sato — two policy board members who opposed negative rates — end in July. This could open the door to new policy makers more in tune with Kuroda’s reflationary stance.

Key points from the BOJ’s decision:

The BOJ kept its short-term rate at -0.1 percent and its target for the 10-year JGB yield at around 0 percent. This was decided by a 7-2 majority vote of the policy board.

The BOJ said it will continue to buy JGBs at "more or less the current pace" — an annual pace of accumulation of about 80 trillion yen ($706 billion).

The central bank left its exchange-traded fund purchases at about 6 trillion yen and its J-REIT purchases at about 90 billion yen annually.

The BOJ kept its overall economic assessment unchanged. It made some

 View a live version of this chart on the .terminal

minor tweaks to components — revising down its view on housing investment to "more or less flat" from "pick-up" and deleting a cautionary phrase on corporate profits.

The market reaction:

The yen rose slightly against the dollar after the BOJ’s decision. It was trading around 113.25 per dollar late afternoon.

The 10-year JGB yield briefly dropped to 0.066 percent from 0.08 percent before the decision.

Stocks climbed marginally. The Nikkei 225 closed up 0.1 percent.

Rising global interest rates tend to buoy yields in Japan. The prospect of two more Fed hikes this year following its latest increase put upward pressure on JGB yields. The People’s Bank of China move to guide market rates higher highlights the way Fed moves put pressure on rates across other major economies, even (in China’s case) those with capital controls. That said, widening U.S.-Japan yield differentials are a force for a weaker yen: good news for Japan’s reflation. PBOC success in managing market rates without hurting growth matters for the BOJ, given the importance of Chinese demand for the Japanese economy.

The weaker yen — it’s down about 10 percent against the dollar over the past

six months even after a recent rebound — is helping increase Japan’s export competitiveness and stoke inflation. Around current levels, the yen has limited room for further gains, according to BI Economics’ estimates, based on U.S.-Japan yield differences and market risk appetite.

The Trump administration’s fiscal policy could have implications for the yen. President Donald Trump has flagged his intention to cut taxes and boost infrastructure spending. But his budget plan makes deep cuts across almost every federal agency and program, as he steps up defense and security spending. The outcome for the bond market is still unclear. A drop in long-term yields though, would spell a stronger yen.

Governor Haruhiko Kuroda avoided providing any indication of conditions that would allow the BOJ to raise its target for the 10-year JGB yield. The central bank has accumulated 76 trillion yen of JGBs over the past 12 months, below its guidance of around 80 trillion yen annually, even as the 10-year yield has exceeded its target. The BOJ may need to step up the pace of purchases —  without changing guidance on the annual pace of accumulation — to keep 10-year yields around 0 percent.

Australia

Pace of BOJ’s Asset Purchases Slowed in February

  Economics Asia 4  March 17, 2017

Australia

Unemployment Jump Masks Better Job MixBy Tamara Henderson, BI EconomistAustralian companies shed jobs in February and the unemployment rate jumped by 0.2 percentage point. But the deterioration was concentrated in part-time work. Moreover, full-time employment improved and overall hiring momentum stabilized after a sharp decline. This bolsters the case for the Reserve Bank of Australia to leave the cash rate target unchanged in the first half.

Employment fell by 6,400 in February following an increase of 13,500 in January. The job shedding was due to part-time work, which fell by 33,500 after a gain of 57,500 in January.

The number of full-time positions increased by 27,100 in February, which helped offset much of the 44,100 decline the previous month. Hiring in 2016 favored part-time labor, a group with less purchasing power and greater sensitivity to the economic cycle. Yet since the fourth quarter, most new jobs have been full-time positions.

Hiring momentum broadly improved in February. The number of new jobs fell in the 12 months to February, to 104,700 from 110,600 in the year to January. But the decline compared with a year earlier was less pronounced and has been steadily improving since November. The number of jobs added in 2016 was 92,100, which was less than a third of net hiring in 2015 and little more than half of the increase in jobs in 2014.

Still, Australia’s seasonally adjusted unemployment rate has started to climb. It was 5.9 percent in February, up from 5.7 percent in January and the highest since January 2016. Household spending growth can defy a rising unemployment rate as long as the mix of new jobs continues to shift in favor of full-time work and participation remains steady. The participation rate held at 64.6 percent in February, moderately below 64.9 percent

 

 

View a live version of this chart on the .terminal

View a live version of this chart on the .    terminal

a year earlier.Hiring trends will be critical for

consumption momentum and RBA policy this year. Wage growth after inflation has started to fall and households are carrying a high level of debt.

The central bank remained upbeat about the employment outlook throughout2016, highlighting the positive cues from

forward-looking indicators amid the mixed bag of labor market signals and considerable variation in conditions across the country.

The February jobs report brought more mixed messages. And, while the underlying mix continues to improve, further easing by the RBA during this cycle can’t be ruled out just yet.

 

Indonesia

Hiring Momentum Stabilizes After Sharp Drop

Drop in Part-Time Hiring Offset Gain for Full-time Workers

  Economics Asia 5  March 17, 2017

Indonesia

Central Bank Shifts to Price Fighting ModeBy Tamara Henderson, BI EconomistBank Indonesia has shifted its focus to keeping inflation on target and signaled a readiness to adjust policy accordingly. This officially shuts the window on more interest rate cuts this year. It also increases the risk of tightening with inflation accelerating rapidly and the economy’s exposure to the risk of capital outflows as the Federal Reserve raises rates. That’s because of the large share of foreign currency debt and non-resident holdings of local currency government bonds.

The central bank kept its seven-day reverse repurchase rate at 4.75 percent today as forecast by all 19 economists surveyed by Bloomberg. It also maintained its forecasts for inflation and growth this year. But Bank Indonesia said it would focus more on keeping inflation within its target. This is likely to mean strengthening monetary and macroprudential policy accordingly. The government and central bank recently agreed six strategic measures to control inflation in 2017 and lowered inflation targets for 2019, 2020 and 2021 in a bid to anchor price expectations.

Bank Indonesia still expects inflation to remain within its 3-5 percent target range this year. Inflation was 3.4 percent on average in 2016. The central bank said previously that higher costs for LPG and electricity could add as much as 0.8 percentage point to inflation in 2017. Energy-related administered prices pose the greatest threat to its forecast, the central bank said earlier.

Inflation jumped 0.8 percentage point in the first two months of 2017, reaching 3.83 percent year on year in February. Part of this was due to higher oil prices, though housing costs also increased strongly. Core inflation rose to 3.41 percent year on year in February from 3.35 percent in January, still within the

 

 Additional live charts on the Bloomberg .terminal

range of its multi-year low.Bank Indonesia maintained its growth

forecast of 5-5.4 percent for this year, compared with 5 percent in 2016. This falls short of the 10-year average of 5.8 percent, which reduces the risk of pass-through from higher oil prices to wages and other prices. Growth slowed to 4.94 percent year on year in the fourth quarter from 5.01 percent in the third as weaker household and government spending offset stronger investment and exports.

The central bank expects stronger domestic demand to help the expansion this year. Export growth is expected to increase, but so is import growth. Investment should be buoyed by stronger credit expansion, which the central bank expects to increase by 10-12 percent, the same projection as in February. There is significant stimulus already in the pipeline. The central bank cut its policy rate by 150 basis points and eased macro-prudential limits in 2016. It also shifted to a new policy benchmark to improve monetary transmission.

Bank Indonesia’s willingness to raise

rates, if needed, is an important move for ensuring that price expectations remain anchored as inflation starts to reflect the jump in global oil prices. It will also boost the central bank’s credibility. This means less tightening will be required when the time comes.

Improvements in the business climate — reflected in the World Bank’s Ease of Doing Business ranking and the World Economic Forum’s Global Competitiveness Index — should also support investment. Moreover, Fitch Ratings and Moody’s Investors Service recently raised their outlooks on Indonesia’s credit ratings to positive from stable. Progress toward ratings upgrades has the potential to establish a virtuous circle of stronger investment and growth.

Bank Indonesia’s willingness to raise rates, if needed, is an important move for ensuring that price expectations remain anchored as inflation starts to reflect the jump in global oil prices. It will also boost the central bank’s credibility. This means less tightening will be required when the time comes.

 

Calendar

Core Inflation Is No Longer Slowing

  Economics Asia 6  March 17, 2017

 

 

Calendar

TIME COUNTRY RELEASE PERIOD SURVEY PRIOR

8:00 New Zealand ANZ Consumer Confidence Index Mar — 127.4

8:00 New Zealand ANZ Consumer Confidence MoM Mar — -1.00%

8:30 Singapore Non-oil Domestic Exports SA MoM Feb -0.10% 5.00%

8:30 Singapore Electronic Exports YoY Feb 11.00% 6.10%

8:30 Singapore Non-oil Domestic Exports YoY Feb 12.50% 8.60%

15:30 Thailand Foreign Reserves 10-Mar — $181.8b

15:30 Thailand Forward Contracts 10-Mar — $23.8b

— Hong Kong Composite Interest Rate Feb — 0.32%Source: Bloomberg ECO<GO>.

TIME COUNTRY RELEASE PERIOD SURVEY PRIOR

16:00 Taiwan Export Orders YoY Feb 21.90% 5.20%

— Philippines BoP Overall Feb — -$9m

Mar. 20-24 Philippines Budget Balance PHP Jan — -118.2b

Click on the to see the full range of economists' forecasts on the terminal. highlighted releases All times local for Hong Kong. Survey figures updated at 5:47 a.m.

Today's Data Releases

Monday's Highlights

Much slower growth in the fourth quarter increases the chances that the next move by the Reserve Bank of New Zealand will be a rate cut. The slowdown was due to weaker consumption and, more surprisingly, exports.

The New Zealand dollar, though weaker more recently, remains strong against currencies of trading partners on a multi-year basis. If these trends are sustained in 2017, further support from the central bank may be required.

New Zealand’s growth slowed sharply in the fourth quarter, falling to 2.7 percent year on year from a downward revised 3.3 percent in the third quarter. The result was far short of the median forecast of 3.2 percent in a Bloomberg survey.

Weaker consumption and a bigger drag from net exports offset a jump in investment and government spending. One positive though: growth, though lower, held above the 20-year average of 2.6 percent and was much stronger than the 2.2 percent pace of expansion a year earlier.

Read the full analysis on the terminal.— Tamara Henderson, BI Economist

Exports, Kiwi May Restore RBNZ Easing Bias

Bloomberg Brief: Economics Asia

 

 

 

 

 

Bloomberg Brief Managing Editor

Paul Smith

psmith152@bloomberg.net

Global Head of Economics

Michael McDonough

mmcdonough10@bloomberg.net

Economics Asia Editors

Nathaniel E. Baker

nbaker14@bloomberg.net

Colin Simpson

csimpson42@bloomberg.net

Ben Baris

bbaris1@bloomberg.net

James Crombie

jcrombie8@bloomberg.net

 

 

 

 

Chief Asia Economist

Tom Orlik

torlik4@bloomberg.net

Asia Economist

Fielding Chen

schen609@bloomberg.net

Asia Economist

Tamara Henderson

thenderson14@bloomberg.net

Asia Economist

Yuki Masujima

ymasujima@bloomberg.net

Asia Economist

Abhishek Gupta

agupta571@bloomberg.net

 

 

Marketing & Partnership Director

Courtney Martens

@bloomberg.netcmartens3

+1-212-617-2447

Reprints & Permissions

Lori Husted

lori.husted@theygsgroup.com

+1-717-505-9701 x2204

Advertising

Lucy Rosen

lrosen23@bloomberg.net

+1-212-617-6759

 

 

 

Interested in learning more about

the Bloomberg terminal? Request a

free demo .here

© 2017 Bloomberg LP.

All rights reserved. This newsletter

and its contents may not be

forwarded or redistributed without

the prior consent of Bloomberg.

Please contact our reprints group

listed left for more information.