October 16, 2017

Stocks in Asia advanced with bonds after inflation data in the US added to evidence that global growth is continuing steadily with limited prices pressures in the US economy. Friday’s data bolstered the view that sluggish US inflation may be structural rather than transitory, prompting traders to reduce slightly the odds of a year-end rate-hike. Gold topped $1,300, while Treasury yields futures lingered near October-lows.

Daily Observations:

Inflation?

Federal Reserve Chair Janet Yellen said on Sunday that her “best guess” is consumer prices will soon accelerate after a period of surprising softness, a forecast echoed by European Central Bank President Mario Draghi and Bank of England Governor Mark Carney.

The inflation wager capped the IMF’s annual meetings at which policy makers cheered the healthiest, most synchronized global economic expansion in a decade, while keeping a wary eye on the weakness of inflation and exuberance of asset prices.

US inflation in September undershot expectations. Year-on-year, CPI gained 0.5% last month, accelerating from the prior month’s 0.4% rise but weaker than the predicted 0.6%. Core CPI faltered to 0.1%, from 0.2% previously; economists were predicting a 0.2% increase. Retail sales in September rose 1.6% month-on-month, rebounding from a 0.1% decline in August and compared to a 1.7% increase predicted by analysts.

Chinese CPI last month rose 1.6% from a year ago, matching expectations but slowing from the 1.8% ascent in August. Factory inflation however, jumped more than estimated; PPI over the same period gained 6.9%, accelerating from the prior advance of 6.3% and surpassing the 6.4% median consensus. Aggressive cuts to capacity in industries like steel and cement, coupled with resilient demand, have contributed to factory inflation that’s lasted longer than economists expected. The drive to cut pollution and boost firms’ efficiency will probably continue as the Communist Party begins its 19th Congress this week.

Geopolitics:

In an interview with CNN on Sunday, Secretary of State Rex Tillerson said President Donald Trump wants him to push forward on diplomacy with North Korea “until the first bomb drops.” While the comments weren’t meant to be taken literally, they come at a time when nations are on edge. South Korean military officials are readying for another possible missile launch by Pyongyang.

In Europe, Austrian voters paved the way for the nationalist Freedom Party to enter government, heralding a shift to the political right that’s likely to make the country a pricklier ally for its European partners.

Chinese Debt:

PBOC Governor Zhou Xiaochuan warned that some Chinese companies have taken on too much debt. In a speech on Sunday in Washington D.C., the governor argued for less financial leverage as well as fiscal reforms. While debt servicing costs remain low, “we need to pay further effort to deleveraging and strengthen policy for financial stability,” he added, appearing alongside policy makers including Fed chair Yellen and Bank of Japan Governor Haruhiko Kuroda. He’s not the only one concerned. Earlier this week, the IMF may have upgraded China’s growth forecasts, but it came with a warning that the economic expansion comes at the cost of a further increase in debt which may mask risks.

Weekly Thematic News:

Singapore Real Estate:

Singapore home sales fell in September as developers marketed fewer projects in a month considered inauspicious by Chinese homebuyers. Developers sold 657 units last month, down from a revised 1,246 in August, according to Urban Redevelopment Authority data released Monday. That’s the lowest sales since January. A total of 73 new units were offered, down from 794 in August, the data showed.

Despite a slow month, Singapore’s property market is showing signs of a turnaround. Home prices rose for the first time in 4 years, snapping a record run of declines and confirming recent signs that the property market is rebounding.

As of Monday, the Smart Real Estate Singapore portfolio on iAdvisor is currently up 23.9% year-on-year, outperforming other REIT indices such as the SGX S-REIT 20 (+14.6%) and the FTSE Straits Times REIT (+14.9%).

FX Updates:

USD/SGD:

Spot: 1.3519

USDSGD declined every day last week before ending below the 1.3500 handle Friday. Some support is expected to buoy the Singapore dollar around 1.3500, although the momentum remains to the downside.

The key resistance at 1.3700 is unlikely to be breached this week.

AUD/USD:

Spot: 0.7880

AUDUSD extended its resurgence back above the 0.7800 on Friday, reaching an October high on the back of USD weakness. Whether the pair can hold above 0.7800 this week is likely to depend on Chinese GDP data due Thursday. Also on the agenda this week is Australia’s jobs report.  

USD/CAD:

Spot: 1.2478

USDCAD traded largely sideways last week, fluctuating around its 1.2500 handle. The pair’s recent recovery seems to have faltered after failing to break above 1.2600.

The important number to watch is 1.2400 – a break below it and the pair could fall quickly back towards the 2-year low of 1.2062. The risk event this week is Friday’s Canadian CPI release.

USD/CNH:

Spot: 6.5743

With the 19th National Congress Meeting commencing this Wednesday, movements on the yuan are expected to be limited the range of 6.5500 – 6.6000.

USD/JPY:

Spot: 111.69

The recent ascent of USDJPY looks to have hit a snag around the 113 handle. The pair retreated back below 112.00 Monday, although traders will be keeping a closer watch on the 111.50 support.  

GBP/USD:

Spot: 1.3309

GBPUSD lingered near a 1-week high Monday. The pair rallied above 1.3300 after it was reported the UK was hoping the EU would consider a 2-year transition period regarding Brexit; the idea was shot down by a spokesman for German Chancellor Angela Merkel.

Markets are now eyeing December as the next important deadline to make progress in the divorce talks, with just over a year to go at that point until Britain leaves the bloc. While most currency strategists surveyed by Bloomberg News see some kind of agreement or transition as a base case scenario, the chance of not getting a deal is a significant risk. The closer we get towards the deadline without any progress, the higher the downside risk for the currency.