Asia Morning Bites: BoK and BI Meetings, G-7 PMI Data, and Global Market Insights

Asia Morning Bites

BoK and BI meet today to discuss policy. G-7 PMI data undermine the higher-for-longer narrative.

 

Global Macro and Markets

• Global markets:  US stocks moved higher on Wednesday despite the backdrop of a thin macro calendar and anxiety ahead of the Jackson Hole symposium. The main catalyst for the move seems to have been some capitulation by bond bears, as bond yields tumbled. Yields were down in Europe after some weaker-than-anticipated PMI figures and were matched by falls in US yields as US PMI data also undershot expectations. The 2Y Treasury yield fell 7.9bp to 4.967%, and the 10 Treasury yield fell 13.2bp to 4.192%. So far, with bond yields down across the board, it hasn’t done too much to FX relativities. EURUSD remains roughly unchanged at 1.0863, though the AUD has caught some support from the drop in US yields, and is up to 0.6479 now. Cable dropped sharply in late trading yesterday before recovering most of the ground lost taking it back to 1.2718, and the JPY is looking stronger today at 144.67.  Asian  FX was mixed. The gainers included the CNY, where the PBoC seems to be winning the war of attrition with markets for the moment, and taking the CNY to 7.2786. After their earlier spike, CNH tomorrow next forward points have dropped back, suggesting the short squeeze from higher funding costs has done its work for now. The CNY’s gains have helped lift currencies across the region, including the SGD and VND. Propping up the bottom of the pack, the PHP and THB both weakened against the USD yesterday.

 

• G-7 macro:  Big drops in Europe’s service sector PMI for August yesterday started the ball rolling for markets. The headline service sector index dropped from 50.9 to 48.3, a contractionary reading, offsetting the slightly higher but still recessionary manufacturing gain from 42.7 to 43.7. The US PMIs released later showed a similar pattern, though the drop in the US service sector PMI to 51.0 from 52.3 still leaves it in weak expansion territory, not recession. There was no respite for the US  manufacturing PMI though, which dropped further from 49.0 to 47.0. If soft survey data like this is backed up shortly by "hard" activity data and labour market figures, then the market's higher-for-longer belief will come under substantial pressure, with negative implications for both bond yields and the USD. That’s still a big if, but the probability has been nudged a little following these numbers. It is also going to make it harder for Jerome Powell to get the nuance right in his Friday speech. If he talks up the data-dependency of policy, then these recent softer releases must play into a less hawkish outlook…? Today’s data isn’t terribly exciting. Jobless claims and durable goods are the main US releases.

 

• South Korea:  The Bank of Korea will meet this morning. We are in line with the market view expecting another “hawkish pause”. At today’s meeting, we think that the BoK will likely strengthen its hawkish stance because inflation will likely reaccelerate in the coming months.  This will be reinforced by the fact that the KRW has also been quite volatile and because household debt is increasing again. The updated economic outlook will be released after the announcement of the policy rate decision. We expect a small downward revision to the GDP forecast mainly due to rising concern over China’s slowdown and the sluggish export recovery. The inflation forecast is likely to remain unchanged, which will support the Bank of Korea’s hawkish stance on monetary policy.

 

• Indonesia:  Bank Indonesia (BI) meets today to discuss policy.  Market expectations point to BI keeping rates unchanged at 5.75% today despite moderating inflation.  Pressure on the IDR is one reason why the central bank could opt for a pause.  But we would not rule out a surprise hike from Governor Warjiyo since the trade surplus, a key source of support for the IDR, has narrowed significantly this year.  A rate hike from BI could help steady IDR now that interest rate differentials have collapsed to a mere 25bps. 

 

 

What to look out for: BoK and BI meetings, Jackson Hole conference on Friday

• South Korea PPI inflation and BoK policy meeting (24 August)

• Indonesia BI policy meeting (24 August)

• Hong Kong trade balance (24 August)

• US initial jobless claims and durable goods orders (24 August)

• Japan Tokyo CPI inflation (25 August)

• Malaysia CPI inflation (25 August)

• Singapore industrial production (25 August)

• US Univ of Michigan Sentiment (25 August)