By Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,
The well-worn adage “sell in May and go away” needs reassessment; or at least re-framing.
That neither Covid nor exceptional policy stimulus are going away imminently, and certainly not evenly, means that spots of pandemic resurgence is not unequivocally cause to sell vaccination disappointment. Admittedly, markets may be more inclined to sell from fairly elevated levels; especially as the expectations boost from the initial (low-hanging) economic recovery and policy stimulus run its course.
But stellar US data backed by unprecedented US fiscal stimulus pipeline (prospects of $2.3 trillion infrastructure stimulus and a complementary $1.8trln healthcare/education program) hot on the heels of the $1.9trln pandemic relief may tempt markets with exceptionally compelling liquidity stimulus.
And perversely, the possibility of constrained summer vacation options due to Covid comeback (multiple mutations), means traders may not sell to close positions into May. Not to the same extent.
Meanwhile, the narrative of US economy hitting out-of-the-ballpark in terms of the strength of recovery may be reinforced by ISM data (Mon & Wed) for April; with China’s Caixin manufacturing PMI also show-casing resounding acceleration (though “official” PMIs decelerated). In China’s case, this “official”-Caixin divergence may be reflecting policy concerns about financial stability constraining credit to larger firms whereas wider economic spillover is felt by smaller firms.
Meanwhile, the Fed’s dovish stance amid wider global policy support is key in determining if “sell and go away” muscle memory kicks in. Mainly as UST yields kept in check help defer risk re-pricing for the time being. But this is merely a necessary condition, not a sufficient one for EM buoyancy.
Point being, the widening lead in US vaccination success over EM Asia – with COVID resurgence in parts of Asia (most prominently and devastatingly in India) setting back recovery, “sell in May and go away” might have to be reframed as “sell where the virus will not go away”.
Meanwhile, in Asia policy options are becoming more constrained with stretched fiscal positions and ultra accommodative monetary policy taunting macro stability.
BoT (Wed) and BNM (Thu) are set to hold apart from liquidity support, deferring to fiscal efforts, while Indonesia’s economic pick-up in Q1 belies lingering fragilities.
The RBA (Tue) is also likely on a pause as front-loaded stimulus is allowed to run its course, while clarity is awaited.
While UST yields picked up from lows below 1.55% the week before, the move in yields is only a partial restoration to levels above 1.7%. In other words, last week’s FOMC, while somewhat more upbeat on prospects has not stirred imminent prospects of reduced policy accommodation just yet.
And so, the focus for bond market bears (betting on much higher rates) is likely to remain on the possible timing of “taper”, which Fed Powell has suggested will be “well before” rate hikes are initiated. The ambiguity is of course, intended.
But getting a sense of this state-dependent normalization is obfuscated by the unprecedented flexible average inflation targeting policy frame-work that means that trying to get a grip on possible triggers for policy normalisation remains tough.
As such, further strength in ISM and jobs data out of the US this week, while likely to support UST yields on dips, need not inspire fresh ground above 1.7-1.8% range. For now, we expect that 10Y UST yields may be in the 1.58-1.78% range; with a slight steepening bent to the curve given the stronger rates anchor.
Renewed Virus Outbreaks Threaten Growth Recovery Amidst Slow Inoculations
The resurgence in Covid-19 infections in India and the ASEAN-6 countries has been more pronounced in recent weeks.
First and foremost, the loss of lives and livelihood during this resurgence has been tragic. In order to restrict the spread of infection, governments’ in these countries have had to tighten social restrictions. Although these restrictions are not severe as they were in March-May 2020, they will hurt the economic recovery.
A lot of hope is riding on the vaccination drive in these countries to stem the spread of COVID-19 but so far, the pace of vaccinations has been slow and in the case of India, unable to keep up with the rapid outbreak.
A big reason for the slow progress has been the availability of vaccine doses as manufacturers struggle to keep pace with demand amongst other factors. Given the current state of play, we have revised down our 2021 GDP growth forecasts for India by 2.4pp to 7.5%YoY, the Philippines by 2.1pp to 4.6% and Thailand by 0.6pp to 2.1%.
Although we have maintained our growth forecasts for Vietnam (6.1%) , Malaysia (5.9%), Indonesia (3.9%) and Singapore (5.9%), the situation is constantly evolving and will be reassessed as appropriate.
For additional details, please see Mizuho Insights: 27 April 2021: ASEAN-6 and India: Renewed Virus Outbreaks Threaten Growth Recovery Amidst Slow Inoculations.
FX Theme: Low-High Yielder Paradox
USD was a mixed bag mostly, rising against low-yielders (which in our context includes JPY, AUD, KRW, SGD HKD) last week, while falling against high-yielders (such as INR, IDR, and PHP). Of course there were exceptions to this trend, with TWD rising with MYR; but that does not change the narrative.
The wider point is that UST yields rising, but in a restrained manner, appears to have unleashed the low-high yielder paradox on measured UST yield pick-up.
Which is that;
i) low-yielders with thinner spreads against USTs are dragged due to no-arbitrage conditions, but;
ii) high-yielders are bolstered by simultaneous hunt for yields amid lower for longer policy guidance.
There are of course other factors at work such as news of international aid in acquiring vaccines and oxygen supplies/equipment for India providing relief for a beaten down rupee.
But the thing about this paradox is that the longevity of this mixed USD dynamic is hard to predict. Depending on wider risk sentiments, a flip to “risk off” dragging high-yielders cannot be ruled out. For now, we expect that further gains in rupee and rupiah may be more cautious; with sustained rallies likely to fizzle more quickly, while low yielders may be primed for catch-up trades.
Meanwhile, whether US ISM and jobs data strength is sufficient to trigger quicker UST yield pick-up and accompanying USD strength remains the main question.
Our suspicion is that USD could consolidate a tad higher, retaining end-April gains. In other words, cautious gains may be the flavour of the week, with AUD paying attention to RBA rhetoric.
RBA: Inaction, Not Inflection
Admittedly, the evidence points to the RBA being done with easing, and the next move likely to be a calibrated move to normalisation. But this is some way off. In other words, inaction, while corresponding to faster than expected economic recovery and more resilient labour market, is not to be conflated with an imminent policy stance inflection.
Admittedly, the Minutes of April MPC are strewn with signs that the RBA assesses the economy to be on a much stronger recovery than it had earlier envisaged. This is started in no uncertain terms with regards to the strength and speed of the economic upturn in Q3 and Q4, led by resilient household consumption, that has resulted in a much smaller output gap that is set to narrow significantly in 2021. And the sharp job market recovery with fewer jobs lost compared to the corresponding part of the cycle in previous crises (including GFC).
Finally, far less dire than feared Covid outcomes, especially relatively to other countries, and consequently manageable mobility restraints helping to steady the recovery path is yet another upside surprise in the context of pandemic shock outcomes.
What’s more, infrastructure catch-up post-COVID, led by the massive US infrastructure plan is expected to have both activity and terms of trade positive multiplier effects for Australia. But a more positive distribution of outcomes is not to be mistaken for the absence of negative risks. For one, the RBA is concerned about subdued wages being despite better than expected employment outcomes and how this is lacks a deeper causal understanding.
In addition, AUD’s climb of 1-1.5% since April last meeting also highlights the risk of premature tightening of overall monetary conditions.
Finally, while additional A$100bn QE to see through Oct a similar A$5bn per week in bond purchases, extends the initial A$100bn QE expiring in Apr, whether this durably quells volatility in long end yield rippling from USTs is highly uncertain.
And so the RBA cannot conclusively declare the end of balance sheet expansion just yet. Policy inaction amid significant economic improvement is encouraging, but short of a catalyst for a decisive policy inflection at early stage recovery; especially as the pandemic evolves and re-emerges.
Indonesia: Q1 GDP Picking Up From Q4 but Still Subpar
We estimate that Q1 GDP growth will be -1.2% YoY, which is only a marginal improvement from -2.2% in Q4. The details will likely confirm what is already implied by the monthly activity data, i.e. that the ‘improvement’ is patchy and uneven across sectors.
Monthly vehicle sales, consumer confidence, retail sales and cement sales point to improving but negative YoY growth in Q1 versus Q4.
External data in terms of exports and capital goods imports improved significantly in Q1 versus Q4, which is encouraging.
Notwithstanding, with Covid-19 cases still rising and the risk of higher cases following the Lebaran period (even though intra-country travel is banned), the growth recovery looks fragile.
Furthermore, Indonesia’s Covid-19 vaccination drive is being hampered by delayed supplies from manufacturers and distributional challenges in reaching the more remote regions.
From a policy standpoint, fiscal policy will probably have to shoulder more of the responsibility with monetary policy space narrowing given IDR and macro-stability priorities.
Bank of Thailand: Maintaining Status Quo
With fiscal policy at the helm, BOT will keep its policy rate unchanged this week ( at record lows of 0.50%) despite the Thai economy being hit by another wave of COVID-19 infections.
Admittedly, this wave of COVID outbreak is proving more fatal and serious than the previous waves. To make matters worse, the vaccination drive has been slow to pick up steam.
But to cushion against/tackle this latest wave, fiscal policy will have to shoulder most of the responsibility as conventional monetary policy tools are hitting their limits.
The Ministry of Finance has cut its 2021 GDP growth forecast to 2.1% from 2.8%, which is similar to our forecast, to take into account the latest Covid-19 developments. And accordingly announced another injection of THB380bn (2.5% of GDP) to boos consumption and investment as the latest wave of infections weigh on these two big channels of growth.
In general, the government has been very active in providing fiscal support to growth. So far, it has borrowed 67% of its THB1trn plan approved in April 2020 and will likely need more funds to support the economy.
Having said that, BOT will be able to extend credit and financial market support through non-rate measures such extending soft loans and buying government bonds. BOT has so far refrained from introducing a formal QE programme and will probably keep it that way at its 5 May meeting seeing as there is no urgent need for a formal programme at this juncture.
Bank Negara Malaysia: Steady as She Goes
BNM will likely keep its policy rate unchanged at 6 May meeting but maintain its dovish bias. Even though new Covid-19 cases remain elevated in Malaysia and the government has extended social restrictions into mid-May, there is little to suggest that an urgent need for further rate cuts.
BNM will remain satisfied in deferring policy support to the government, which remains focused on expediting the vaccination drive.
Unlike most countries in the region, Malaysia’s vaccination procurement has not been as challenging as its drive to get its citizens to register given the low registration rates for vaccinations.
Nonetheless, under the assumption that the vaccination drive picks up some steam in the coming months as the government allows all citizens above 18 years of age to become eligible for the jabs, the Covid-19 situation could slowly be brought under control.
Furthermore, the recent boost to commodity prices including oil will support the economic recovery. As such, BNM has still reason to pull the trigger on further rate cuts imminently.
Source: Mizuho Bank Ltd