Samuel Tse, Economist

DBS Group Research

Please see below a rundown of this week’s key data releases and events with macro relevance:

  • China’s 3Q GDP release is due this Friday. We expect growth to slow to 6.4% in 3Q18, owing to softening domestic demand.
  • Japan’s headline inflation would likely have risen for the fourth month in a row, to 1.4% YoY in September.
  • We expect the Bank of Korea to hold the 7-day repo rate at 1.50%.

Chart of the Week: Real rates have room to rise in India, Indonesia, the Philippines, South Korea, Taiwan, and Thailand

As currencies come under pressure with the Fed hiking rates and tightening liquidity, and inflation appears to have bottomed, there is room for real rates to rise in Asia (driven by tighter monetary policy). Already, policy rate hikes and still-low inflation have pushed up real interest rates in India and Indonesia, although they are not particularly high; we think there is definitely room for real rates to increase against the background of good growth momentum. Beyond India and Indonesia, we see room for higher real rates in the Philippines, South Korea, Taiwan, and Thailand. In contrast, China is clearly on course to ease monetary conditions; real rates will likely decline further there.

Source: CEIC, DBS. Real rates are through September, except for China, Hong Kong, Malaysia, and Singapore (August). Short term rates are calculated using the difference between 3-month interbank borrowing rate and headline inflation (annual average forecast), except for Philippines (91-day treasury-bill yield).

China: The GDP growth is expected to slow to 6.4% in 3Q18. Domestic demand should have continued to slow. Retail sales growth is projected to have eased to 8.6% YoY in September from 9.0% in August. Likewise, industrial production would have moderated to 5.8% from 6.1%. This largely mirrors the contraction in new export order component of the official manufacturing PMI (below 50 for 4 consecutive months), due to increasing trade frictions. Fixed asset investment should have bounced back somewhat to 5.5% in September, thanks to July’s RRR cut. Looking ahead, the 100 bps cut of RRR announced last week will release further liquidity to buttress growth. The PBOC will also likely offer more longer-term cash via MLF to cope with the deterioration of corporate and local government cash flow. These will in turn increase the monetary supply. Yet, the authority has spared no effort in the controlling the financial risk by shifting the shadow banking product bank onto the book. In fact, off-balance sheet products shrank for 6 consecutive months. On inflation, the rising food price should continue to add upward pressure to CPI. Yet, PPI will moderate due to external uncertainties and high base effect.

Hong Kong: Thanks to robust local economic growth (real GDP rose 4.0% YoY in 1H18), the labor market should remain tight. Recovery in inbound tourism and domestic consumption (visitor arrivals and retail sales value increased 17.4% and 12.5% YOY respectively in 2018 YTD) should support the labor market in 3Q18. The seasonally-adjusted unemployment rate is expected to stay at a 20-year low of 2.8%. Looking forward, the potential repercussion from the Sino-US trade friction on the stock market warrant attention. Hang Seng Index slump to 25,000 from its year-high of 33,000 points of late. The negative wealth effect to the local spending sentiment might blow headwinds to the retail sector as well as the labour market.

Japan: CPI inflation is expected to have risen for the fourth month in a row, to 1.4% YoY in September. Like in the previous months, the rise should still be largely driven by the volatile food and oil components. Core-core inflation is expected to have remained subdued at 0.4%. Despite the mild uptrend, inflation figures are not strong enough to convince the BOJ to kick-start monetary policy normalisation. The 10Y JGB yield crawled up to 0.15% in Early-October from 0.10% a month ago, due to the spillover effects from higher global rates; but remained lower than the upper limit of the BOJ’s target band of 0.20%.

India: Trade numbers for September are likely to register a fourth consecutive month of above USD17bn deficit, with our forecast at USD17.2bn. Exports are likely to rise 25% YoY, but imports will likely outpace at 31.5% as higher oil and non-oil purchases weigh on the trade balance. Imports tariffs have been raised in recent weeks to contain the extent of deterioration in the current account balance, but the impact is likely to be limited as main commodities of gold, oil and consumer electronics are still out of its purview. A challenging global demand environment will be of little help in boosting exports receipts over the coming months.

Indonesia: We estimate trade balance to record a deficit of USD0.73bn as export remains weak while import accelerate on the back of higher oil price. Despite Rupiah depreciation, export will remain weak growing at 6.1% yoy in September from 4.15% due to continuous fall of Indonesia’s commodity export basket prices in general and weak global demand. On another account, manufacturing export has not taken advantage of Rupiah depreciation just yet as global demand remain weak. Import, is projected to remain high at 26.6% yoy, due mostly to higher oil price while several policy measures to contain import such as B20 requirement and higher income tax tariff on most of consumption goods – which account for 0.01% of GDP – seemed to have an insignificant or lagging impact on import so far. In addition, detail plan on the postponement of several infrastructure projects that has been highlighted before, has not materialized either.

Singapore: Non-oil domestic exports for Sep18 is due this week and there is strong optimism for a double-digit expansion. Expectation is a surge of 10.9% YoY. Pharmaceutical could spring some surprises but an improvement in electronics exports would be crucial. That said, September may be inflated by the low base in the same period last year. So, all eyes should be on the month-on-month change, which will provide a better indication of the turn. In this regard, there could be too much fear on the impact of the trade war. US demand for Chinese goods could be diverted to ASEAN countries amid the tariff actions taken by the US. This could in turn mitigate against the drag arising from dilution in trade flows due to the trade war.

South Korea: The Bank of Korea is under limelight this week. Government officials have been urging the BOK to raise rates since last month, citing the soaring property prices and widening negative rate gap with the US. The BOK governor has also emphasized the important role of the central bank in addressing financial imbalances during the recent speeches. That said, the deterioration in macroeconomic outlook and the spreading of risk-off sentiment in the financial markets may not be helpful in allowing the BOK to hike rates at this week’s meeting. The IMF just lowered Korea’s 2018-19 growth forecasts last week, citing a weaker global outlook as a result of trade war, liquidity tightening and EM strains. The BOK is set to release its quarterly economic review this week and a GDP forecast downgrade is also likely. Our central case scenario is for the BOK to hold rates at 1.50% this week. While we see 45-50% chance of a 25bps hike, we believe a dovish move is more likely than a hawkish one (here).

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