By Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,
Inflation & Infection
It is a surreal world in which US markets are fretting inflation risks from a vigorous economic rebound fueled by unprecedented policy stimulus, while India and ASEAN have hunkered down with renewed (quasi-) lockdowns to brace against another wave of infections.
US inflation worries, reflected in surging breakevens, is encapsulated in massive NFP miss being read as labour shortage that drive up costs. But with 8.2 million unrecovered Covid job losses, this may be a sign of highly frictional, if not dysfunctional job markets amid record stimulus.
For now, this has not unsettled short USD bets as the surge in 10Y breakevens in excess of bump up in 10Y UST (nominal) yields means real US yields are softer (more negative). Nevertheless, caution transmitting via wider asset market channels such as a 2.6% drop on Nasdaq highlights risks of cross-infection.
This has trimmed long AUD bets (backing down from rallies towards 0.79 to below mid-0.75). EUR has also slipped a touch below mid-1.21 while USD/SGD is bumped up above mid-1.32.
Caution though may stall USD/JPY pick-up above 109.
Malaysia Q1 GDP: Flattered Rear View
Malaysia’s Q1 GDP may reveal a more upbeat picture of the recovery, but projecting the flattering images from rear-view mirror under-accounts for bumps and sputters ahead. And Malaysia’s nation-wider MCO (movement control order) imposed yesterday, in the face of sharply rising Covid cases (breaching 4,000 new cases a day), is the elephant in the room that simultaneously points to the severity of outbreak and recovery interrupted.
For the record, the relief is that Malaysia’s Q1 GDP is poised to snap negative YoY growth to expand fractionally as, in BNM’s words, “latest indicators point to continued improvements in economic activity in the first quarter and into April”. We concur.
And encouragingly the pick-up appears to be fairly broad-based as improving external demand amid global recovery coincides with a pick-up in domestic consumption; which continues to be judiciously supported by government spending.
A worrying third wave of Covid, that demands requiring sweeping MCO is however the more pertinent risk on the road ahead, regardless of the encouraging rear-view. As the BNM had noted on less disruptive iterations of MCO, “while the recent re-imposition of containment measures in select locations will affect economic activity in the short term, the impact will be less severe as almost all economic sectors are allowed to operate”.
Admittedly, refined MCO execution, even if nation-wide, that allows economic activity to resume within safe-distancing/social restriction, can significantly mitigate negative impact. But unfortunately, the economy cannot be immune to the threat of new strains/mutations.
In particular, three areas of risks are worrying. First, there must be some degree of pullback in the “high-touch” services sector. And this could have a (negative) multiplier effect. Especially considering the semi-formal and informal sectors, which are hardest hit by MCO.
Second, given high levels of household debt, any impact on incomes for affected households may require policy intervention; necessarily entailing some banking-balance sheet trade-of. In turn, this may slow credit channel boost to the recovery on the way out.
Finally, the government’s stretched fiscal position means harsher trade-offs between fiscal support and means.
Encouragingly though, the government is unequivocally prioritizing tackling the outbreak recognising that the choice between healthcare and the economy is a false one.
The upshot is that while Malaysia’s recovery course is by no means derailed, it will almost certainly be delayed. And the real risk is not merely the delay, but rather the uneven recovery that may exacerbate pain and setbacks in some sectors more than others.
Credit: Mizuho Bank Ltd