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Tuesday
March 7, 2017
March 7, 2017
RBA Decision; China Reserves; Turnbull, Widodo MeetBy Colin Simpson and Ben Baris
What to Watch: The announces its policy rate decision Reserve Bank of Australiaat 11:30 a.m. (see chart below) — follow the for real-time coverage and TOPLive bloganalysis. The consensus forecast for China's February foreign reserves is a further decline to $2.969 trillion after January's fall below the $3 trillion mark to $2.998 trillion. Reserve Bank of New Zealand Governor speaks in Auckland. Graeme Wheeler
Economics: Japan reports on official reserve assets at 7:50 a.m. releases TaiwanFebruary CPI data at 8:30 a.m., with economists surveyed by Bloomberg expecting the headline year-on-year rate to fall to 0.70 percent from 2.25 percent previously, 8:30 a.m. Taiwan also reports on trade, 4 p.m., while the issues CPI figures, 9 a.m. Philippines
Government: Australian Prime Minister heads to Jakarta for his Malcolm Turnbullsecond meeting with Indonesian President in two weeks as the neighbors Joko Widodoseek to capitalize on a thaw in their sometimes-fraught diplomatic relationship by completing a free-trade agreement this year. Timing to be confirmed.
Companies: The heads of Australia’s , and , three of the nation’s CBA ANZ Westpac"big four" banks, face a parliamentary panel in Canberra in which they’re expected to defend lending practices and credit-card fees. announcements are due from EarningsMTR Corp, PLDT, Value Partners and Luoxin Pharma.
Markets: The declined 0.3 percent while the lost 0.5 S&P 500 Stoxx Europe 600percent Monday. The weakened 0.4 percent to $1.0585. Mexico’s euro pesostrengthened past its 200-day moving average. slipped 0.2 percent to settle WTI crudeat $53.20 a barrel. slumped 0.1 percent to settle at $1,225.50 an ounce.Gold futures
(All times local for Hong Kong.)
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Commentary
Investors appear to see little likelihood of disruption to the existingconditions of fractious stability on the Korean Peninsula. North Korea’s escalating provocations are testing whether that attitude makes sense:
and .Justin Jimenez Tom Orlik
U.S. Federal Reserve Chair Janet Yellen has hinted strongly at a March move, raising the prospect of three rate increases in 2017. The trouble with that: accelerating Fed hikes threaten to China’s current disturbtranquility: .Tom Orlik
Hong Kong and other Asia operations remain central to HSBC's : outlook
.Francis Chan
Quote of the Day
"The bank will maintain highly accommodative financial conditions, with a view to achieving the price stability target of 2 percent, and ensure the overcoming of deflation."
— Bank of Japan board member Takako
Masai, according to the text of a speech
released by the BOJ
About $2.1 billion of foreign money has flowed into the Thailand's bonds this year, making the country the top destination among Southeast Asia’s emerging markets and buoying the baht. It’s causing for policy problemsmakers who are trying to revive an economy whose growth has slowed for the past two quarters. Bank of
Governor Thailand Veerathai said Feb. 23 that Santiprabhob
foreigners saw the country as a "safe haven" and the baht’s strength wasn’t helping the economy.
Korea
Strong Aussie, Softer Jobs Maintain 2017 Rate Cut Risk
The Reserve Bank of Australia may leave the cash rate target unchanged at 1.5 percent. Growth recovered somewhat in the fourth quarter and inflation, up 1.5 percent in the quarter from a year earlier, made progress toward the central bank's 2 percent to 3 percent target. Still, the risk of another rate cut in 2017 remains. Hiring momentum continues to falter and the trade-weighted Australian dollar remains strong. It has risen 2 percent since the Federal Reserve tightened policy on Dec. 15. Last year, the RBA cut rates in May and August in response to unwanted currency strength.
— Tamara Henderson, Bloomberg Intelligence economist
Economics Asia 2 March 7, 2017
Korea
Kim Missiles and Global Shifts Add Peninsula RiskBy Justin Jimenez and Tom Orlik, Bloomberg Intelligence economistsProvocations from Pyongyang — the capital of North Korea — have become so familiar that financial markets have become desensitized. Even with nuclear weapons tests across the border, South Korea’s won and Kospi equity index have remained relatively unfazed. Investors, it seems, see little likelihood of disruption to the existing conditions of fractious stability.
North Korea’s escalating moves — with reports of what could be an intercontinental ballistic missile fired Monday — are testing whether that attitude makes sense.
North Korea’s nuclear program has advanced rapidly since its first successful test in 2006, with two detonations in 2016. The outgoing Obama team warned President Donald Trump’s new administration they consider Pyongyang their top national security priority. Against that backdrop, the latest signals from North Korea are troubling. Ballistic missile tests and the assassination of Kim Jong-un’s half-brother point to an increase in aggression and instability.
As the events of last week demonstrate, it doesn’t take a major crisis to create significant ripples. South Korean hotel, cosmetics and tourism-related stocks sold off Friday on reports China may be halting sales of holiday packages to its neighbor. The concern is that China could use sanctions in response to South Korea’s planned deployment of the THAAD missile defense system — a joint scheme with the U.S. to defend against an attack from the North.
Conditions in the other players on the peninsula are also changing, and not in a way that will make resolution easier:
President Trump’s foreign policy stance remains erratic in communication and unclear in substance — adding uncertainty to the U.S. position.
The impeachment of South Korea’s former President Park Geun-hye, a hardliner on the North, has left the country with a power vacuum.
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China’s relations with North Korea have cooled. A ban on coal imports will reduce Pyongyang’s sales to its big neighbor by more than 50 percent, taking a significant chunk out of its FX earnings.
U.S. plans for the deployment of the THAAD missile-defense system in South Korea and Trump’s back-and-forth on Taiwan policy threaten to undermine trust between Washington and Beijing.
The worst case scenario — armed conflict and a messy collapse of Kim’s regime — is unlikely. An attack by North Korea on the U.S. or its allies would likely be the last thing it ever did. Conflict would also be a disaster for the rest of the region.
South Korea — with its capital Seoul close to the border — would be in the direct line of fire. China would face a flood of refugees, and the risk of a U.S. ally on its northeastern border.
Conflict might not be in anyone’s interest. But with increasing pressure on North Korea as its export lifeline is cut off, increased uncertainty about U.S. policy, and diminished trust between Washington and Beijing, the chances of a mis-step by one of the parties have surely increased.
Continued muddling through — which
remains the most likely option — alsocomes with costs, especially for South Korea. Living in the shadow of the North represents a continued burden, across multiple axes. The drag on consumer and corporate confidence is difficult to measure, but is surely there. Mandatory conscription for South Korean men is a negative for the labor market. Political energy that could be expended on economic reforms or expanded trade deals is instead tied up in security concerns.
Last week’s stock sell off shows that tensions with China can also be costly. China sent 8.1 million visitors to the country with a population of 51 million in 2016 — a significant contribution to demand.
In the best case scenario, market reforms similar to China’s during the 1980s could put North Korea’s economy onto a path of rational development. Optimists point to increasing trade and small-scale manufacturing activity on North Korea’s border as hopeful signs. Even so, in the light of the latest developments, the chances Pyongyang will move from rogue to developmental state appear slim.
China
China-North Korea Coal Trade
Economics Asia 3 March 7, 2017
China
Fed’s China Confidence Misses Hike Blowback RiskBy Tom Orlik, Bloomberg Intelligence economistWhat a difference a year makes. At the start of 2016, China’s capital outflows, sliding growth, and factory-gate deflation placed an obstacle in the path of Federal Reserve tightening. At the start of 2017, with those negatives reduced or reversed, China is providing a supportive environment.
Fed Chair Janet Yellen has hinted strongly at a March move, raising the prospect of three rate increases in 2017. The trouble with that: accelerating Fed hikes threaten to disturb China’s current tranquility. The People’s Bank of China will be faced with a difficult choice: follow the Fed up and hurt highly-leveraged corporates and investors or keep rates on hold and face yuan weakness and capital outflows.
The contrast between China a year ago and China today is clear:
In January 2016, the Shanghai Composite Index — China’s main equity gauge – fell 22.6 percent, the biggest drop since the 2008 financial crisis. Capital outflows peaked at $170 billion in December 2015, according to Bloomberg Intelligence Economics’ estimates. Now the equity market is stable and capital outflows much reduced.
In the first quarter of 2016, China’s growth was continuing to slide as stimulus struggled for traction. Manufacturing PMIs were dropping further into contractionary territory. Now growth has stabilized and momentum seems to be robust, with those same business surveys surprising on the upside in February.
In the first quarter of last year, China’s factory sector was still stuck in deflation, with the producer price index ending the quarter down 4.3 percent year on year. Now it is roaring up, rising 6.9 percent in January and likely with further gains to come. That hasn’t yet passed through to U.S. import prices but likely will do so in the months ahead.
Reflecting that shift, Fed officials have upgraded their assessment. Back in February 2016, Yellen flagged uncertaintyon China’s exchange rate policy and economy as a risk to U.S. growth. Fast forward to March 2017, and Yellen
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concluded that, "the prospects for further moderate economic growth look encouraging, particularly as risks emanating from abroad appear to have receded somewhat." A recent speech by board member Lael Brainard noted how China had stabilized growth and calmed fears on financial instability.
So far, so good. Missing from the picture, though, is the potential for blowback from accelerating Fed tightening to a still-fragile Chinese economy and policy settings. After all, it was in the period immediately after the Fed’s December 2015 move that China saw its biggest capital outflows and sharpest equity market drop. This time around, the most likely channel for stress is through the exchange rate and capital account. A narrowing U.S.–China rates differential would intensify pressure for yuan weakness and risk re-accelerating capital outflows.
As we have argued elsewhere, that would leave the PBOC with a number of unpalatable choices:
Raising rates to maintain an unchanged rate differential would ease pressure on the yuan at the expense of adding stress for leveraged corporates and investors.
A yuan float would be the market-based solution but would risk massive capital outflows.
Muddling through with slightly higher market rates, managed yuan depreciation
and capital controls appears the most likely option but would not be easy to manage.
Adding to the challenge, in normal circumstances Fed rate hikes reflect a strengthening U.S. economy — with the promise of increased demand for made-in-China products. This time around, that seems less guaranteed. U.S. President Donald Trump has yet to precisely formulate his trade agenda. Bloomberg Intelligence Economics’ view is that a trade war will be avoided because of the high costs it would impose on both sides. Even so, early signs are not encouraging. The Office of the U.S. Trade Representative, for example, used its 2017 strategy paper to link the loss of U.S. manufacturing jobs with China’s entry to the World Trade Organization. If trade frictions increase, the pass-through from stronger U.S. demand to Chinese exports will be weakened.
Summing up, the Fed is right that a stronger Chinese economy removes one of the barriers to raising rates. The lack of adverse reaction to the December 2016 move is an additional reason for confidence. What’s difficult to calculate, though, is what impact accelerating Fed moves will have on China’s strength. In the worst case scenario, China would face either heightened financial stress, increased capital outflow pressure, or both. If that happens, the Fed could find itself right back where it started.
BI Insight
Estimated Capital Outflows
Economics Asia 4 March 7, 2017
BI Insight
HSBC's Strategy Aims to Capture Asia GrowthBy Francis Chan, Bloomberg Intelligence analystHong Kong and other Asia operations remain central to HSBC's outlook, as income from the region is this year poised to benefit from rising U.S. interest rates.
This should be supported by a strongdeposit franchise and benign credit quality throughout 2017. Asian units were 74 percent of HSBC's adjusted pretax profit in 2016, versus 65 percent in 2014.
Asian rates may rise in line with Fed hikes this year, boosting net interest income at HSBC's units in Hong Kong and the rest of Asia. A hike of 25 basis points each quarter this year may boost net interest income in these regions by a combined $784 billion, or about 46 percent of group, the bank said.
Asia units comprised only 39 percent of HSBC's risk-weighted assets as of December. Consensus expects a total 75-basis point hike in the Fed funds rate by the first quarter of 2018.
Low-cost deposits in Hong Kong are likely to continue to be critical to containing HSBC's group funding costs in 2017. Deposits in the city helped boost group retail banking revenue last year as they increased 9.5 percent in 2016, versus a 4 percent drop in the rest of Asia and 7.3 percent decline for the rest of world.
The Hong Kong units, including subsidiary Hang Seng, have over 700 branches in the city, contributing 36.3 percent of group deposits last year.
Market Indicators
Net Interest Margin Sensitivity
25 basis point shift in yield curves at the beginning of each quarter. A hike of 25 basis points each quarter this year may boost net interest income in Asia by a combined $784 billion.
Customer Deposit Accounts
Economics Asia 5 March 7, 2017
Market Indicators
Calendar
Source: Bloomberg. Updated at 5:57 a.m. Hong Kong time.
Economics Asia 6 March 7, 2017
Calendar
TIME COUNTRY RELEASE PERIOD SURVEY PRIOR
6:30 Australia AiG Perf of Construction Index Feb — 47.7
6:30 Australia ANZ Roy Morgan Consumer Confidence Index 5-Mar — 119.1
7:50 Japan Official Reserve Assets Feb — $1231.6b
8:30 Taiwan CPI YoY Feb 0.70% 2.25%
8:30 Taiwan WPI YoY Feb 3.00% 2.72%
9:00 Philippines CPI Core YoY Feb 2.60% 2.50%
9:00 Philippines CPI NSA MoM Feb 0.30% 0.30%
9:00 Philippines CPI YoY Feb 3.20% 2.70%
11:30 Australia RBA Cash Rate Target 7-Mar 1.50% 1.50%
13:30 Australia Foreign Reserves Feb — A$68.6b
15:00 Malaysia Foreign Reserves 28-Feb — $95.0b
16:00 Taiwan Trade Balance Feb $3.80b $3.50b
16:00 Taiwan Exports YoY Feb 16.40% 7.00%
16:00 Taiwan Imports YoY Feb 24.90% 8.40%
17:00 Singapore Foreign Reserves Feb — $252.74b
— Hong Kong Foreign Reserves Feb — $391.5b
— Philippines Foreign Reserves Feb — $81.0b
— China Foreign Reserves Feb $2969.0b $2998.2b
— Indonesia Net Foreign Assets IDR Feb — 1524.0t
— Indonesia Foreign Reserves Feb — $116.89bSource: Bloomberg ECO<GO>.
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 5:52 a.m.
Today's Data ReleasesThe People's Bank of China will update on foreign exchange reserves for February. The consensus forecast points to a moderate drop to $2,969 billion from $2,998 billion in January. That reflects continued pressure from capital outflows, forcing the PBOC to run down its reserves to support the yuan. A steadier currency may have helped reduce the incentive to move capital offshore. Tighter controls on cross-border capital flows were also a stabilizer.
— Tom Orlik and Fielding Chen, Bloomberg
Intelligence economists
Inflation may have continued to rise in February, following a 2.7 percent year-on-year reading in January. This would put inflation closer to the middle of the central bank's 2 percent to 4 percent target. Favorable base effects for oil are unwinding. Domestic demand remains robust. And the peso continues to tumble against trading partners, increasing the cost of oil and other imports. Yet the impact of supply disruptions from several strong typhoons may fade. Food price inflation is showing signs of a peak.
— Tamara Henderson, Bloomberg Intelligence
economist
China Foreign Reserves
Philippines CPI Inflation
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