By Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,
The Difference Between Jobs & Work
But good jobs number is not synonymous with “substantial progress” that is required for decisive Fed action. The distinction being that “substantial progress” is about the ground made up from the depths of job losses, which requires far more work than at-the-point speed of NFP jobs suggest.
Splitting hairs over this is not just an academic exercise, but rather an acknowledgement that the Fed needs to be as confident that it is now that downside risks will continue to be more than offset by economic improvement (and vaccinations effectively addressing lingering pandemic risks).
In other words, it is as much about the improvement so far in jobs as it is confidence that the trajectory will continue to be consistent with further improvement given that even at the current pace of NFP jobs, employment numbers in Q4 will fall short of pre-COVID levels.
This partly explains why UST yields, despite recovering appreciably from sub-1.2% lows, is well short of what’s historically consistent with inflation expectations and impending “taper”.
“Risk off” arguably explains for some of the remnant yield drag (amid haven demand for USTs).
For the week, the combination of “taper” prospects, China risks (both delta induced restrictions as well as hawkish regulatory posturing) and wider global delta outbreak worries are likely to keep EM (including EM Asia) markets in a cautious mood.
Markets are likely to couple with the solid July jobs print is US CPI (Wed).
Any upside surprise will instigate more UST yield upside amid “taper” bets; although interaction between nominal UST yields and inflation expectations infuse uncertainty around real yields.
Slight upside surprise in CPI and PPI are not sources of concerns as China’s ability to absorb inflationary pressures remains significant and reassuring.
Much less so, it’s regulatory crackdown and the delta outbreak. So the latter will be the sources of EM Asia risk spillover.
Philippines and India are in focus. The former for Q2 GDP, where the bounce on a low base will be overshadowed by worries of fresh lockdown; while the BSP (Thu) is forced to sit on its hands.
India meanwhile will continue to struggle with subpar (although appreciable and welcome) recovery in activity amid “third wave” risks marred by elevated and sticky inflation (Thu).
Malaysia’s Q2 GDP (Fri) despite misleadingly solid headline print masks the pandemic’s deleterious effects on the economy amid worrying political uncertainty.
FX Theme: The Jobs Dollar Bull
A bullish US jobs report for July that has lifted yields has taken the USD along with it.
The Greenback is climbing across the board, with EUR knocked back to low-1.17 and frustrating the AUD’s attempts to break past 0.74 convincingly, with a knock back to low-0.73.
Notably, USD strength has been most brutal on Gold (down almost 4%); compared to the 0.5% slip in JPY, 0.8% hit in EUR and just over 1% knock on AUD.
And this is very revealing about the nature of USD strength that is manifesting at this juncture. Specifically, it is “taper”-driven strength in the USD, which in essence is a (at least partial) reversal of USD debasement mechanics.
Admittedly, this has been accompanied by a distinct (albeit measured) bounce in real yields off recent lows around -1.2% to around -1.05%.
That said, real yields remains exceptionally low, and it is not clear that further and sustained rise in real yields is a given at this point. Which suggests that the rise in the Greenback may still be susceptible to interruptions should real yields hesitate in the pick-up and/or slip back.
But that said, given the FX landscape is framed by;
i) an eclectic coincidence of Fed “taper” focus starting to come home to roost with rhetoric chiming in on Q4 Fed shift and;
ii) undercurrents, if not episodes, of “risk off” due to China and resurgent “delta”.
Both of which are biased to a stronger USD in line with the preference for haven refuge.
Yes, there does appear to be somewhat of a contradiction between “taper” driven markets and the suggestion of “risk off” in the same breath (or week for that matter). But the way to square that apparent conflict here may be to recognise that both are tilted to favouring advantage of the USD.
This however may play out as measured and considered USD dominance over EM Asia FX rather than a frenzied sell-off in AXJ; especially if CNY anchor helps to backstop AXJ.
US Treasuries: NFP Bear Steepening
The 180-degree turn in UST yield dynamics driving yields higher led by the long-end – in other words, a sharp bear steepening – was predominantly (although not exclusively) driven by blockbuster July non-farm payroll numbers.
More specifically, the strong jobs print – both in the headlines and in the details – resonated with Fed Vice Chair Clarida’s views that the Fed is on course to initiate “taper” as soon as early as late-2021.
As a consequence of which, long-end yields have been hoisted off the slide to test below 1.2% back to (and then above) 1.3%.
Admittedly, the NFP jobs report is perhaps a step in the right direction with regards to the Fed’s “substantial progress”; which is the precondition for “taper”.
But if the question is whether this is sufficient to get yields to rise durably, then perhaps there is less clarity and assurance; as it is in-coming data that will be critical in informing the Fed’s stance at the “Fall” (Sep) FOMC.
For now, we expect that initial Fed rhetoric suggesting “taper” flag off in Q4 as the default – in the absence of downside data surprises – means that the next 3-6 months may be more congruent with buoyed or higher longer-end yields.
For the week though, we expect 10Y UST yields to acclimatize higher in the 1.23%-1.44%, with “risk off” impulses from China risks and/or delta the likely sources of interruptions or setbacks to upside.
EM Asia Growth Downgrades: A Conspiracy of Headwinds*
A litany of downside risks confronting EM Asia dim prospects for unfettered recovery.
Accordingly, these risks demand that full-year 2021 growth projections be revised down as growth momentum looks set to falter in H2; in turn retarding a fuller recovery from COVID.
In particular, a trifecta of headwinds comprising; i) delta variant ; ii) China policy tightening and; iii) frustrating supply-chain kinks, conspire to setback already lagging EM Asia recovery.
A coincidence of political risks (in some cases) exacerbates these economic headwinds. More so as growing policy constraints compromise the ability to buffer negative shocks.
Yet the lack of clarity challenges quantifying revisions further out with a good degree of confidence. As such we have confined growth downgrades to H2 2021 given headwinds may be tempered in 2022 (perhaps even flip into tailwinds) in the context of; i) pick-up in vaccinations; ii) policy calibrations as Beijing balances regulation with recovery; iii) “pent-up” demand help boost recovery alongside abatement in the worst of supply-side cost-push.
Moreover, growth downgrades across EM Asia will be highly differentiated. This could be due to the distortion of base effects, such as Indonesia’s exceptional H1 growth buffering H2 headwinds and Philippines’ dismal 2020 flattering 2021 outcomes.
Crucially, differentiation may be based on factors such as; varying impact from tourism multiplier (warranting Thailand’s significant downgrade from prolonged travel restrictions), vaccine rollout advantages/lags, policy constraints and political uncertainties (e.g. Malaysia).
*For the full report, GDP revisions and country-specific take-aways please refer to: https://www.mizuhogroup.com/binaries/content/assets/pdf/singapore/macro/ad-hoc/flash/mf_em-asia-growth-downgrades_aug-6-2021.pdf
Philippines Q2 GDP: Don’t Judge the Recovery by the jump in Headline GDP growth
The overly depressed base from the same period last year will make the jump in Q2 2021 look stellar, if not enviable. We expect growth will jump to 9.8% YoY from -4.2% in Q1.
But to takeaway that the Philippines economy is on better footing than a year ago would be misleading, even deceptive.
In reality, it is only a modest easing of stringent social restrictions compared to 2020 that boosted growth, This is despite Manila and the neighbouring provinces being under lockdown in April 2021. Last year, the clamp down allowed for virtually no activity across the country.
As such, private consumption and investment spending benefitted. While export growth, consistent with the rest of the region, rebounded as global production lines were restored.
The path to a more enduring recovery is, however, fraught with roadblocks and uncertainties. Shortages in vaccination supplies have constrained the nations’ vaccination drive. With <9% of the population been fully vaccinated (as of 3 August), herd immunity is a long way off.
This necessarily means that periodical lock downs will have to be resorted to to stymie the spread of Covid-19. But will significantly retard GDP growth and labour market recovery.
The main takeaway is that the Philippines economy, despite what the Q2 GDP print might suggest, is floundering with Covid-19 related headwinds unlikely to dissipate this year.
Bangko Sentral ng Pilipinas: No Immediate Antidote for the Prolonged Economic Pain
Second, the imminent tapering or at least talk of tapering from the US Federal Reserve will exert depreciation pressure on Asian currencies, PHP is no exception. Taken together with recent PHP weakness, BSP would be better served being cautious.
Finally, targeted fiscal policy is still the more appropriate policy response to Covid-19 risks, leaving the BSP’s remaining options limited to credit/liquidity measures including a 200bp cut in the Reserve Requirement Ratio.
Bank of Thailand: Growth Pains Push A More Dovish Stance
BOT’s meeting on 4 August took a distinctly dovish turn.
The composition of the MPC vote, which had been unanimous for a over a year, shifted to 4-2; with 2 members voting for a 25bp rate cut.
The two members deemed that further support growth was needed after the 2021 GDP growth forecast was reduced to 0.7% from 1.8%, the fourth growth forecast downgrade so far.
BOT made clear that both monetary and fiscal policies would be critical to aid the economic recovery. The latter focused on addressing labour market and business sector vulnerabilities while the former “must contribute to continued accommodative financial conditions overall”.
To that end, comments around the recent THB weakening were limited to BOT stating that it was monitoring the impact of depreciation on business activity.
BOT reinstating policy rate cuts as an option, from already historically low levels of 0.50%, is another sign that pandemic inflicted growth pains continue to push policy-makers to limits, which even a few months ago, were thought sacrosanct.
Meanwhile, quantitative easing, which was discussed as an option by BOT, seems to have been ruled out for the moment.
Malaysia Q2 GDP: As Good As it Gets
Q2 GDP growth is forecasted to pick up to 8.4%YoY from -0.5% in Q1. The distorted low base from last year allows for an optically spectacular GDP print but will sequentially reflect a significant deterioration in growth momentum. We estimate -8.6% QoQ SA from +1.5% in Q1.
This is not surprising given that a large, economically significant, part of the country has been under the strictest form of lock down since June 2021 gnawing away at industrial production (given reduced capacities at factories), retail sales and intra-country travel.
Worryingly, the main objective of the lockdown: to bring down COVID-19 infections has so far not been met convincingly. Daily cases have only started to decline from peaks above 17K.
The recent political theatre around the legitimacy of PM Muhyiddin’s position, and the ensuing street protests, threaten to unnecessarily distract from focused handling of the pandemic.
This will be especially troublesome if government spending, the mainstay for counter-cyclical policy support at the moment, begins to bear the brunt of the political turmoil.
Furthermore, even as vaccination rates improve, the mix of vaccination brands – effective mRNA ones with the less effective Sinovac – is obfuscating herd immunity thresholds.
All signs point to a protracted struggle with Covid-19 interspersed with ill-timed political upheavals. Malaysian assets, including MYR, will bear the brunt of this.
Credit: Mizuho Bank Ltd