Markets Overview - United Overseas Bank

Monday, 16 August, 2021
Lee.SueAnn@uobgroup.com

Global Economics & Markets Research
Email: GlobalEcoMktResearch@uobgroup.com
URL: www.uob.com.sg/research

Markets Overview
HIGHLIGHTS AHEAD

   For this week, the focus could be on central banks from developed markets. While there is again no G7 monetary policy decision
    this week, the Federal Reserve will release the July FOMC minutes (19 Aug, 2am SGT) – which will be closely parsed for further
    hints about the pace of potential tapering and rate increases – and we will have FOMC Chair Powell hosting a town hall discussion
    with educators mid-week (18 Aug, 1:30am SGT). Attention will be on the Reserve Bank of New Zealand’s (RBNZ) August policy
    decision on Wed (18 Aug, 10am SGT) and expectations are tilted towards a 25bps policy rate hike to 0.5% following the robust
    New Zealand’s 2Q employment data. Norges bank will also be in the spotlight with a policy decision (19 Aug), where it may
    further affirm its earlier signal to prepare markets for a September rate hike.

   Data focus for G7 this week will be Japan. The main data is this morning’s Japan preliminary 2Q 2021 GDP data which grew by
    1.3% q/q SAAR, better than expectations (Bloomberg Est +0.5% q/q SAAR) while the 1Q decline was revised smaller to -3.7%
    (from -3.9% previously). Despite the resurgence of COVID-19 infection, domestic spending grew by a stronger 0.8% q/q (much
    better than Bloomberg Est of 0.0%, up from -1.0% q/q in 1Q) while business spending also beat expectations, growing by 1.7%
    q/q (Bloomberg Est 1.3% from -1.3% in 1Q). The decline in inventory (-0.2ppt) and net exports (-0.3ppt) weighed on the 2Q
    rebound.

   For today (16 Aug), the rest of G7 data docket includes Japan’s final print for Jun industrial production, Italy’s general government
    debt for Jun, Canadian Jul existing home sales, US Aug Empire manufacturing survey (Bloomberg Est 28.5 from 43 in Jul) and
    US Treasury International Capital (TIC) flows data for Jun.

   For the rest of the week, there is a less substantial US economic data calendar (compared to the preceding two weeks) but the
    key data will be retail sales, industrial production and housing data for July. Inflation data for July will be in focus for Japan and
    especially for Eurozone (18 Aug) which is expected to be significantly upward revision. The US$1 trillion American infrastructure
    investment bill will also remain in the news as the Senate has voted on it and passed the baton to the US House of
    Representatives. Even though the House is already on recess until 20 Sep, but House Majority Leader (Dem) Steny Hoyer said
    the chamber would return 23 Aug to consider the budget resolution.

   That said, Bloomberg reported (citing Punchbowl News) that nine moderate House Democrats signed a letter to House Speaker
    (Dem) Nancy Pelosi threatening to withhold support from a US $3.5 trillion budget blueprint until a bipartisan infrastructure
    package is signed into law.

   The US key economic data for this week include:
    o US Jul advance retail sales (17 Aug, Bloomberg Est -0.2% m/m, from +0.6% in Jun),
    o US Jul industrial production (17 Aug, Bloomberg Est +0.5% m/m, from 0.4% in Jun),
    o US July building permits (18 Aug, Bloomberg Est 1% m/m from -5.1% in Jun), housing starts (Est -2.6% from 6.3%)
    o US Philadelphia Fed Business Outlook for Aug (19 Aug, Bloomberg Est 24.0 from 21.9 in Jul)
    o US Initial jobless claims (19 Aug). We expect a further dip to 365k (from 375k in previous week) while continuing claims are
        also expected to ease to a fresh post-pandemic low of 2.8mn (from last week’s 2.866mn)
    o US Jul leading index (19 Aug, Bloomberg Est +0.7% m/m same as in Jun)

   Rest of G7 economic data include:
    o Japan’s June core machine orders (18 Aug, Bloomberg Est -2.9% m/m, 15.6% y/y from 7.8% m/m, 12.2% y/y in May),
    o Japan’s July trade data (18 Aug, Bloomberg Est exports at 39.2% y/y, from 48.6% in Jun, imports at 35.2% y/y, from 32.7%
        in Jun, trade surplus at JPY 194.6bn from JPY384bn in Jun),
    o Japan’s July CPI (20 Aug, Bloomberg Est -0.4% y/y from -0.5% in Jun) and core CPI (Bloomberg Est -0.4% y/y from -0.5%
        in Jun)
    o Final print for 2Q 2021 GDP for the Eurozone (17 Aug) is expected to remain unchanged from prelim estimates of 2% q/q,
        13.7% y/y.
    o Eurozone’s final July CPI print (18 Aug) which is expected to be significantly revised to 2.2% (from prelim estimate of 1.9%)
        while core CPI is expected to stay unchanged at 0.7% y/y.
    o UK’s ILO Jun unemployment rate (17 Aug, Bloomberg Est 4.8%, same as in May),
    o UK’s Jul CPI (18 Aug, Bloomberg Est 0.2% m/m, 2.3% y/y from 0.5% m/m, 2.5% y/y in Jun), and core CPI (Bloomberg Est
        2.1% y/y from 2.3% y/y in Jun)

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    As for the COVID-19 pandemic developments in G7, the US Centers for Disease Control and Prevention (CDC) adopted a
     recommendation from its Advisory Committee on Immunization Practices to have people in the US with weakened immune
     systems get three shots of the COVID-19 vaccine.

    In Asia’s data docket today, China’s industrial production, retail sales and fixed asset investment are expected to show further
     growth moderation in July while the surveyed unemployment rate is forecast to remain at 2-year low of 5.0%. The initial impact
     of the Delta variant coronavirus outbreak in the Chinese cities will be reflected in weaker July retail sales and a sharper than
     expected slowdown could dampen China’s growth outlook in 2H21.

    Ahead of the Loan Prime Rate (LPR) fixings this Friday, market will be watching how much the People’s Bank of China (PBoC)
     will offset for the CNY700 billion of 1-year medium-term lending facility (MLF) that matures today. The 1-year MLF rate is likely
     to remain unchanged at 2.95%.

    Thailand’s 2Q21 GDP (Bloomberg est -1.2% q/q, +6.6% y/y, UOB est -1.3% q/q, +6.3% y/y from +0.2% q/q, -2.6% y/y in 1Q21)
     is forecast to register a year-on-year growth after five preceding quarters of contraction but outlook remains weak as COVID-19
     cases continue to rise sharply despite current lockdown measures.

    Political uncertainty heightens in Malaysia with Prime Minister Muhyiddin Yassin said to be tendering his resignation to the King,
     Sultan Abdullah Ahmad Shah, today. Political parties will attempt to work out a deal while the King can appoint an interim Prime
     Minister from among the lawmakers. If the Parliament is dissolved, an election must be held within 60 days.

    Bank Negara Malaysia (BNM) has revised lower its GDP growth target to 3.0%-4.0% (from 6.0%-7.5% previously) last Friday as
     a result of its movement restrictions and surge in COVID-19 infections. Our 2021 full-year GDP growth forecast remains at 4.0%
     (2020: -5.6%). (Malaysia: 2Q21 GDP Rebounds Strongly On Base Effects, 13 Aug 2021).

    Indonesian President Joko Widodo’s State of the Union speech and 2022 budget proposal will also be closely watched today.

    South Korean markets will be closed for holiday today.

CENTRAL BANK OUTLOOK

    Reserve Bank of New Zealand (RBNZ) will announce its August policy decision on Wed (18 Aug, 10am SGT). According to the
     Bloomberg poll of the 18 economists (16 Aug), only 3 expect no change to its policy rate at 0.25% but 14 expect a 25bps hike to
     0.5%, and 1 expects a 50bps hike to 0.75% as the latest jobs data (released on 4 Aug) showed New Zealand’s unemployment
     rate dropping markedly to 4% in 2Q 2021, the lowest since Dec 2019 and back at pre-COVID levels after the pandemic lockdowns
     saw the unemployment rate surging to 5.3% in 2020. Wage growth also accelerated in 2Q with private sector labour cost index
     (LCI) rising by 0.9%, higher than the forecast 0.6% increase.

    Reserve Bank of Australia (RBA) will release its Aug policy meeting minutes on Tue (17 Aug, 9:30am SGT) while RBA Deputy
     Governor Kent will speak at a conference on Fri (20 Aug, 7:05am SGT).

    Other than FOMC Chair Powell speaking in a town hall (18 Aug, 1:30am SGT), the other senior FED officials speaking this week
     are Minneapolis FED President Kashkari (non-voter in 2021 FOMC) who will hold a Town Hall on the economy on Wed (18 Aug,
     3:45am SGT) and Dallas FED President Kaplan (non-voter in 2021 FOMC) who will speak at the Texas Tech University College
     of Business on Fri (20 Aug,11pm SGT).

    Bank Indonesia (BI) will announce its policy decision on Thursday (19 Aug). With the current global development, we are of the
     view that BI has less room to trim its benchmark rate further. Nonetheless, BI will keep its accommodative monetary policy via
     other monetary, macroprudential, and liquidity supporting measures to effectively transmit the lowering of the benchmark interest
     rate so far into the economy. We keep our BI rate forecast to stay at current level of 3.50% for the rest of 2021.

    In China, the 1-Year and 5-Year Loan Prime Rate (LPR) fixings are expected to be kept unchanged at 3.85% and 4.65%
     respectively on Friday (20 Aug). However, we expect the PBoC to cut the banks’ Reserve Requirement Ratio (RRR) another
     time to inject more liquidity into the system as growth risks increase while consumer price inflation has remained tame.

FX

    The US dollar ended the session broadly weaker against the G-10 currencies on Fri (13 Aug) as the US Dollar index (DXY)
     ended 0.6% lower to close at 92.518 (from the previous close of 93.035). The euro appreciated with the EUR/USD closing higher
     in the NY session at 1.1797 (from 1.1730). The pound also ended stronger with GBP/USD pair closing higher at 1.3866 (from
     1.3808). The yen appreciated against the dollar as well and USD/JPY pair ended the day below 110 for the first time in a week
     at 109.59 (from 110.41).

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   The Aussie and the kiwi dollar both strengthened against the dollar in tandem with the majors as the AUD/USD ended higher at
    0.7370 (from 0.7335) while the NZD/USD was also higher at 0.7042 (from the previous session close of 0.7002).

   USD/Asians were broadly firmer on Friday to reflect a more cautious sentiment in Asia. The KRW (-0.66%), TWD (-0.17%) and
    MYR (-0.14%) led declines while SGD (+0.21) strengthened the most.

   USD/SGD ended at 1.3550 on Friday after trading a range of 1.3543-1.3593. On our model, the SGD NEER is at 0.20% above
    the mid-point this morning with +/-0.5% from the mid-point implying USD/SGD range of 1.3506-1.3642 based on the current FX
    levels.

   USD/CNH rose to a session high of 6.4853 before ending flat at 6.4776 on Friday. The pair also closed the week little-changed.

EQUITIES
   US stock markets ended on record highs on Fri (13 Aug) despite the plunge in the latest US consumer sentiment to its lowest in
    nearly a decade, as markets rode on the positive equity performance out from Europe and also focused on the better than
    expected earnings report from a US media giant. The S&P 500 index was up by 0.16% to 4,468.00, while the Dow Jones
    Industrial Average (DJIA) ended higher by about 15 & half points (0.04%) to close at 35,515.38. The NASDAQ also inched up
    by 0.04% on Friday to end at 14,822.90. The CBOE volatility Index (VIX) or “fear index” eased marginally lower to 15.45 (from
    15.59 previously).

   The MSCI Asia ex-Japan index closed the previous week with a loss of 1.28%, after falling for a third straight day by 0.97% on
    Friday.

   In Asia, sentiment was weighed by the spread of the coronavirus’ Delta variant which has dampened the near-term economic
    outlook in the region. The decline in the stock indexes on Friday were led by the Philippines PSEi (-3.61%), Taiwan TAIEX (-
    1.38%) and KOSPI (-1.16%) while India’s Nifty 50 (+1.01%) and KLCI (+0.21%) closed firmer.

US TREASURIES/BONDS
   The US Treasury prices rose as yields fell across the curve on Fri (13 Aug) on concerns about the COVID-19 delta variant,
    reflected by the plunge in US consumer sentiment. The 10-year UST yield was lowered by 8.2bps and closed the at 1.277%
    while the 30-year bond yield closed down by 7.6bps to 1.929%. The UST 2-year yield was lower by just 1.6bps to 0.207% while
    the 5-year yield ended down by 5bps to 0.773%. As a result, the 2-year and 10-year yield spread flattened (by 6.5bps) to 107.3bps.

   The US Treasury will conduct the usual 3-month and 6-month Treasury bill auctions on Mon (13 Aug), followed by the usual 4-
    week and 8-week Treasury bills auctions on Thu (19 Aug). The Treasury will conduct a 20-year UST Bond (18 Aug) and a 30-
    year TIPs (19 Aug) auction this week.

   Bloomberg reported (14 Aug) that the recent US Treasury adjustments to the bill supply suggest an attempt to return to a regular
    and predictable issuance schedule, with infrequent Cash management bill (CMB) issuance and creation of additional headroom
    under the debt ceiling. The US Treasury slashed the sizes of three- and six-month bill auctions by US$3bn each as it tries to
    stay below the debt limit, which was reinstated at the start of August. At the same time, it will also sell a US$50bn 57-day CMB,
    while ending the 42-day CMB after the 19 Aug settlement.

   The Markit iBoxx Asian Government Bond Total Return Index fell 0.11% to 209.244 last Friday, bringing the index to close down
    by 0.87% for the week.

   In Asia, yields rose the most in Indonesia on Friday with the 2-year up 6.9bps to 3.13% and 10-year closing higher by 2.8bps to
    6.32%. Meanwhile, the 2-year yield fell the most in India by 0.6bps to 4.19% and 10-year fell the most in Malaysia by 0.8bps to
    3.24%.

   There is no notable issuance on Asia’s government bond auction calendar today.

COMMODITIES

   Crude oil prices fell on Fri (13 Aug) as the resurgence in COVID-19 infections (due to delta variant) across the world is weighing
    heavily against energy demand recovery. Meanwhile, oil prices were also dampened by the latest Baker Hughes report that
    showed US energy firms added the most oil rigs in a week since April. The number of US oil rigs rose by 10 to 397 this week,
    their highest since April 2020, and up from 172 a year ago, which was their lowest since 2005 before the shale boom boosted
    activity. The London Brent oil future closed lower by US$0.72 (-1%) to US$70.59/bbl while the NY WTI ended the session lower
    by US$0.65 (-0.9%) to US$68.44/bbl.

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   One positive in support of crude prices was that a major US bank opined that a recent (Wed, 11 Aug) call by the US to OPEC+
    to boost oil output is unlikely to result in higher production over the short-term given the threat to demand from the COVID-19
    Delta variant.

   Meanwhile, oil markets will also be watching Tropical Storm Fred which reformed and is making its way up the Gulf of Mexico
    toward the Florida panhandle and Alabama.

   Gold price climbed last Friday as the US dollar & Treasury yields tumbled and renewed concerns about COVID-19 delta variant
    reflected by a decline in a US consumer sentiment index, contributing to the demand for the precious metal. It ended higher by
    nearly US$27 (1.5%) to US$1,779.74 per troy ounce on Fri (13 Aug).

ECONOMIC NEWS & DATA

   US prelim University of Michigan consumer confidence survey for Aug tumbled heavily to 70.2 (versus Bloomberg Est 81.2),
    from 81.2 in Jul. This was the lowest reading since Dec 2011, and it comes amidst the COVID-19 delta variant spreading rapidly
    across the US, leading some states and cities to reinstate mask mandates and other health restrictions. Hospitals in many states
    in the southern part of US are also reporting a shortage of beds to handle patients. Other than the delta variant, rising prices
    could also be another factor dampening US consumers’ sentiment.

   US export and import prices continued to rise in Jul, as export prices continued to increase at an accelerated pace (1.3% m/m,
    17.2% y/y from 1.2% m/m, 16.9% y/y in Jun) while the increase in import prices slowed (0.3% m/m, 10.2% y/y from 1.1% m/m,
    11.3% y/y in Jun).

   The Port of Los Angeles is bracing for potential shipping disruption after the latest shutdown at China's Ningbo-Zhoushan port.
    According to Bloomberg report citing Mercury Resources, many chartering firms are already adding COVID-19 contract clauses
    as insurance against stranded ships. The Baltic Dry Index rallied and prices for shipping one container from Shanghai to Los
    Angeles surpassed US$10,000 this month.

   The crisis in Afghanistan is unfolding at an unexpectedly fast pace, catching US President Biden and his administration off-guard
    as the Taliban have gained control of the capital, Kabul after the Islamic group marched into the Afghan capital on Sun (15 Aug).
    The group has now taken control of the presidential palace with plans to soon declare a new "Islamic Emirate of Afghanistan."
    According to Bloomberg reports, American-backed President Ashraf Ghani fled the country to avoid further bloodshed while the
    US embassy was being evacuated with the acting ambassador among those fleeing to the airport. Former president Hamid
    Karzai said he will form a coordinating council to manage a peaceful transfer of power. The AP reported Afghan troops
    surrendered Bagram Air Base, which the US just handed over in July this year after almost 20 years. Sweden joined the UK,
    Germany, Canada, Italy, Australia and other countries in announcing plans to pull diplomats but Russia said it is not planning to
    evacuate its embassy in Kabul.

   Canadian Prime Minister Justin Trudeau has called for a snap federal election on 20 Sep (2021), seeking to retake a majority in
    Canada’s parliament on the back of polls showing many voters approve of his government’s handling of the COVID-19 pandemic.
    According to a Bloomberg report (15 Aug), public opinion surveys show his Liberals, in power since 2015, with support in the
    mid-30% range which is near the threshold they will need to regain control of the 338-seat House of Commons.

   Note that the other G7 country that needs to call for a general election soon is Japan of which its 49th general election of
    members of the House of Representatives (Diet) is scheduled on or before 22 Oct (2021), as required by the Constitution of
    Japan.

   India Prime Minister Narendra Modi said on Sunday during his speech at the Independence Day celebrations that the government
    will launch a INR100 trillion (USD1.35 trillion) national infrastructure plan that will help generate jobs and achieve its carbon
    efficiency goals.

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Disclaimer

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