1. KBank FX & Rates Strategies Economics / Strategy
FX / Rates
Markets’ Look Out and Out Look
28 February 2011
It is close to Jobs Friday again. Consensus
remains optimistic that US firms will hire about
Fig 1. US non-farm payrolls
190k
'000
800 Statistically, consensus has been 62% too
600 optimistic of the time i.e. forecast being higher
400 than actual since the crisis began
200 US 4Q GDP was revised down from 3.2% to 2.8%
0
as fiscal stress limits government spending
-200
-400 Rising crude and refined product benchmarks
-600 challenges Asian policy makers’ endeavors to
-800 keep the inflation genie in the bottle
-1000 Look to Bank of Thailand’s economic release for
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 January’s figures
non farm payroll - actual survey …and the Ministry of Commerce’s inflation
readings for February
Source: Bloomberg, CEIC, KBank
The situation in Libya looks to be winding down,
but concerns remains in other Middle East
regimes, especially OPEC nations such as Algeria
and Saudi Arabia
Kobsidthi Silpachai, CFA –Kasikornbank Disclaimer: This report must be
kobsidthi.s@kasikornbank.com read with the Disclaimer on
page 6 that forms part of it
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2. Jobs Friday…for the US
As with every first Friday of the month, one of the most probably watch revisions from earlier estimates of 3.2% to 2.8%. This brings back the
economic barometer of the US recovery is shown on fig 1, that is the contentious issue of the fiscal health of both the state and federal
creation of jobs for Americans. The last reading was filled with controversy governments.
as optimists cited that the reason why the World’s largest economy only Fig 3. US Federal government budget to GDP, projection
created 36k in jobs outside the agricultural sector was because of the estimates based on CBO figures
weather and cold spells. This round, economists are penciling in some
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+190k in new jobs…well…last time, they thought it was going to be a +146k.
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If we count back for the past 29 months since the collapse of Lehman
0
Brothers, economists have forecasted a higher non-farm payrolls numbers
-2
higher than actual for 18 reading or about 62% of the time. So the odds are
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slightly higher than calling heads or tails that the actual reading could fall
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short of expectations. -8
US 4Q10 GDP revised down from 3.2% to 2.8% -10
To put more pressure on optimists were the Friday’s revision of 4Q10 GDP -12
Fig 2. US GDP readings and consensus survey
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
%
US budget surplus / deficit as % GDP projected
8
6 Source: Bloomberg, CEIC, KBank
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2 The US Federal government remains in a pickle as to whether its operations
0 would be shut down due to a funding gap. Reports suggest that, not only is
-2
this coming Friday crucial to the jobs data but whether the US government
-4
would be temporary closed. Republicans and Democrats remain at odds as
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-8
to what to cut and how much to cut to trim the US budget deficit. According
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 to the Congressional Budget Office (CBO), the US Federal government is
still poised to spend nearly USD 1.4 trillion more than it can earn in 2011, i.e.
GDP QoQ annualized - actual survey the size of the budget deficit . To put that into a Thai context, that is about
Source: Bloomberg, CEIC, KBank
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3. 4.5 times the size of Thailand’s economy in 2010 (which was about USD Thai authorities hope to contain the inflation genie in the bottle, but in
330bn). actuality, the inflation has already crossed over into its borders. Subsidies
Asia Inflation…the depreciating wealth effects act as a mechanism of distortion. As seen during much of 2004, the then
Along with the key macro figures for the month of January that the Bank of government subsidized diesel capping at THB14.75 a liter in an endeavor to
Thailand will be releasing, the Ministry of Commerce will publish the reading keep the Thai economy on a dual track, that is having both an external
for February’s inflation figures. Consensus is looking for the print to remain demand as well as a domestic demand component to growth. Subsidies are
at a 3%, unchanged from January’s reading. Local dailies continue to focus not accounted yet into consumer inflation.
on the palm oil shortage problems which are reflective of the food and
inflation crisis that is on going and spreading. Like the Tiananmen Square Fig 5. Singapore Gas oil benchmark and Thai retail diesel
events over two decades ago, inflation is suspected to be a root cause of the
140 40
current upheavals of the Middle Eastern authoritarian regimes. Fig 4 is our
130 38
estimates of Asian inflation which includes: China, Hong Kong, India,
Indonesia, South Korea, Philippines, Singapore, Taiwan and Thailand. The 120 36
individual countries inflation indices are rebased to January 2007 and 110 34
weights are a simple average. 100 32
Fig 4. Asian Inflation index, % YoY 90 30
80 28
120 8%
70 26
7%
115 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11
6%
110 Singapore gasoil, USD / barrel, right axis Thai diesel, THB / liter, left axis
5%
105 4% Source: Bloomberg, CEIC, KBank
100
3% Consider the following:
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 2%
95
1% Rising commodity prices are passed to Thai producers, further
90 0% accommodated by a weak local currency preference to help exporters.
Thai producers pass on the costs. Price ceilings are ineffective as
Asia average inflation index, Jan 07 = base, left % YoY, right
producers will not supply the market at a loss if that loss is perceived to
Source: Bloomberg, CEIC, KBank be more permanent than temporary.
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4. The price ceilings apply to consumer prices and not to prices sold by the The Thai bond market continues to price in that the Bank of Thailand will
producer that is the wholesale price exceeds the retail price. The proceed to raising short term interest rates in an endeavor to counter the risk
difference is then subsidized by the government, which is captured as that core inflation exceeds their 3.0% ceiling. We view that the Thai central
“government expenditure” but not yet accounted as consumer inflation. bank will resume raising the policy repo to 2.50% when the Monetary Policy
Committee (MPC) meets again on 9 March.
Only when the subsidies are unsustainable, will governments capitulate
owing to resulting severe imbalances. In 2004 to 2005, the subsidy of diesel Fig 7. Thai bonds implied forwards
resulted in a nearly THB 100 bn burden on the Oil Fund in which the burden % Implied bond yield curve shifts
fell on taxpayers, users of gasoline as well as users of diesel fuel as regional 4.50
benchmark receded, the price at Thai pumps did not. Rather than 4.25
4.00
encouraging more efficient usage of energy, the subsidy creates a moral 3.75
hazard. Undesired behavior like excessive usage and possibly smuggling 3.50
out diesel results in a reversal from a current account surplus into a deficit. 3.25
3.00
2.75
Fig 6. Thai headline CPI, survey
2.50
% 2.25
10 2.00
8 - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
6 Feb-11 May-11 Aug-11 Feb-12 tenor (yrs
4
Source: Bloomberg, CEIC, KBank
2
0
-2
-4
-6
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
Thai headline inflation, % YoY survey
Source: Bloomberg, CEIC, KBank
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5. Markets are expected to be jumpy on Middle East
events Fig. 9 shows that the downside on the USD/CNY NDF still has somewhat
As political events in Libya looks to be winding down, the concern is the tepid expectations in comparison to what economists are penciling in. The
contagion to other regimes such as Yemen, Bahrain, Oman but especially NDF market is looking for a downside of about 2% by the end of the year
OPEC nations like Algeria and Saudi Arabia which would cause oil prices, whilst consensus is expecting a more aggressive fall of about 4.2%.
inflation expectations and EM risk aversion to remain elevated.
This should bode the further downside on USD/THB, once we pass the
Fig 8. OPEC production capacities intermediate hurdle of risk aversion to EM assets.
'000 barrels per day
14000 Fig 9. USD/CNY NDF expectations
12000 USD/CNY NDF curve
6.90
10000
8000 6.80
6000 6.70
4000
6.60
2000
6.50
0
Venezuela
Saudi Arabia
Ecuador
Angola
Qatar
Algeria
Kuwait
Libya
Iraq
Nigeria
Iran
U.A.E.
6.40
mths forward
6.30
0 1 2 3 4 5 6 7 8 9 10 11 12
Source: Bloomberg, CEIC, KBank
2/27/2011 1mth ago 3mth ago 6mth ago 1yr ago
Similar to the culling process of the weakest links amongst the Euro zone
Source: Bloomberg, CEIC, KBank
members, the markets will be scrutinizing for which Asian countries are
behind the curve. We view that after China has again raised its triple R
(reserve requirement ratios) to stamp down on money supply growth and
excessive demand pull inflation, it will have to augment its tightening
monetary policy with more flexibility on its currency to counter supply side -
cost push / imported inflation.
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6. Disclaimer
For private circulation only. The foregoing is for informational purposes only and not to be considered as an offer to buy or sell, or a solicitation of an offer to buy or sell any
security. Although the information herein was obtained from sources we believe to be reliable, we do not guarantee its accuracy nor do we assume responsibility for any
error or mistake contained herein. Further information on the securities referred to herein may be obtained upon request.
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