Monday, 19 May 2014 Weekly Update

Other US manufacturing-related data releases include April Chicago Fed National Activity index (22 May), and the May Kansas City Fed manufacturing act...

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UOB Economic-Treasury Research

Monday, 19 May 2014

Weekly Update

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Weekly Review (for week ending 16 May 2014)

Global Markets: Things will probably be less exciting this week (19-23 May) with a relatively light data docket in the US as it heads into a long weekend next Monday (US markets will be closed on Monday, 26 May for US Memorial Day while the UK will also be closed for a Spring Bank holiday on the same day). The Bank of Japan (BOJ) is the only major central bank with a monetary policy decision this week on Wednesday (21 May) while the Bank of England will release its latest minutes on the same day. The key US focus will probably be the release of the minutes for the 29-30 April 2014 FOMC meeting on Wednesday (21 May). The key US manufacturing data this week will be the May preliminary Markit US manufacturing PMI survey on Thursday (22 May). Other US manufacturing-related data releases include April Chicago Fed National Activity index (22 May), and the May Kansas City Fed manufacturing activity survey (22 May). Today, trade ministers from 12 countries negotiating the Trans-Pacific Partnership will be in Singapore for a 2-day meeting (19-20 May). Attendees include Japan Economic Minister Akira Amari and US Trade Representative Michael Forman. While no major breakthrough is expected from this round of meeting, it is hoped that a broad agreement can be reached before the US mid-term elections in November. The US housing data will also garner market interest as markets continue to expect the US housing recovery in April after the bad weather months in 1Q. These housing data include the April existing (22 May) & new home sales (23 May), and MBA mortgage applications (21 May). And to gauge the health of the US consumer, we have the usual weekly initial jobless claims (22 May), the Bloomberg economic expectation & consumer comfort survey (22 May), the April leading index (22 May). The key data to watch in the rest of the developed economies will be the May manufacturing and services PMI surveys for euro-zone and its key constituents (22 May), the German May IFO survey (23 May), German April PPI, the UK April CPI and RPI (20 May), UK April retail sales (21 May), UK final 1Q-2014 GDP (22 May), German final 1Q-2014 GDP (23 May), Japanese economic data with the key focus on the March machine orders (19 May), April department store sales (20 May and most importantly, the April trade balance (21 May). After tumbling down for 2 straight days, US stocks finished higher on Friday (16 May) after a choppy session with the S&P 500 Index climbing to an intraday high that eclipsed a high set in April before retreating to end day 7 points higher but little changed for the week as a whole. Investors were buoyed by better than expected earnings reports from some listed US retailers as well as solid US housing data but was dampened by a surprise slide in US consumer confidence. Overall positive investor sentiment lured investors’ interest back into equity and US Treasury prices edged lower and yields climbed higher with the 10-year UST yield back above 2.5% mark. That said, the continued unraveling of the Ukraine crisis may keep a lid on the rise of UST yields. The US dollar crept higher against the Euro on the back of the mixed US economic data while traders continued to price in an increasing likelihood of more ECB easing coming in June. But otherwise, the USD was broadly weaker against most of the other major FX on Friday (16 May). Global oil prices diverged again on Friday and this time US oil prices rebounded due renewed hope for US gasoline demand ahead of the looming US summer-holiday driving season and the ongoing Ukraine crisis while Brent futures edged lower on the return of Libyan supply to the market but it still held above US$109 as investors had an eye on the upcoming Ukraine elections.

______________________________________________________________________________________________________________________________________________________________ United Overseas Bank (Malaysia) Bhd. (271809K)

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UOB Economic-Treasury Research

Weekly Update Monday, 19 May 2014

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Central Bank Outlook US Senate Majority Leader Harry Reid scheduled a Senate vote on ending debate on the nomination of Stanley Fischer to be vice chairman of the Federal Reserve for this week on 20 May. According to an unnamed Senate Democratic aide, Lael Brainard and Jerome Powell also may be confirmed before the end of May to the seven-member Fed Board. Getting their nominations confirmed early is important as current Fed Governor Jeremy Stein has already indicated he will leave the Fed Board on 28 May to return to teaching at Harvard University and his exit will leave the Fed board with just three of seven governor positions filled for the first time in its history: Chair Janet Yellen, Daniel Tarullo, and Powell, who is being re-nominated for a second term. And if that is the case, it will shift the axis of voting powers to the rotating Fed district bank presidents - Richard W. Fisher (Dallas), Narayana Kocherlakota (Minneapolis), Sandra Pianalto (Cleveland), and Charles I. Plosser (Philadelphia). William C. Dudley, the New York Fed President is a permanent voter on the FOMC and he is also the Vice Chairman to the Fed board. The next meeting of the Federal Open Market Committee will be held on 17-18 June 2014 which is accompanied by an updated Summary of Economic Projections and a press conference by the Chair. There will several Fed officials speaking in public forums this coming week. The Fed speaker list includes Philadelphia Fed President Charles Plosser (voter in FOMC 2014) speaking about the US economy in Washington, FOMC Chair Janet Yellen giving the commencement speech in New York University, Kansas City Fed President Esther George (non-voter in 2014 FOMC) on US economic and banking outlook in Washington and, Minneapolis Fed President Narayana Kocherlakota (voter in 2014 FOMC) on monetary policy in Minneapolis. All will be speaking on 21 May. Bank of England Governor Mark Carney identified the sharp increase in housing prices as the biggest risk to the UK economy in his strongest warning about the UK property market. According to excerpts of a TV interview on Sunday, Carney said housing in the U.K. has “deep, deep structural problems,” and markets will take this as a strong signal that BOE soon may respond to the housing price gain. Equities After tumbling down for 2 straight days, US stocks finished higher on Friday (16 May) after a choppy session with the S&P 500 Index climbing to an intraday high that eclipsed a high set in April before retreating to end day 7 points higher but little changed for the week as a whole. Investors were buoyed by better than expected earnings reports from some listed US retailers as well as solid US housing data but will dampened by a surprise slide in US consumer confidence. The S&P 500 closed 7.01 points (0.37%) higher to 1,877.86 while the Dow Jones Industrial Average (DJIA) was up by 44.50 points (0.27%) to close at 16,491.31. The NASDAQ was the best performer among the 3 major indices. The NASDAQ rose by 21.296 points (0.52%) to close at 4,090.588. The CBOE Volatility Index (VIX) eased lower to 12.44 (from 13.17 previously). US Treasuries Overall positive investor sentiment lured investors’ interest back into equity and US Treasury prices edged lower and yields climbed higher with the 10-year UST yield back above 2.5% mark. That said, the continued unraveling of the Ukraine crisis may keep a lid on the rise of UST yields. The 10Y US Treasury closed 3.4bps higher to 2.5231% while the 5-year UST yield ended higher by 3.1bps to end at 1.5541% and the 2Y UST yield was also higher by 0.8bps at 0.3589%. As for US Treasury auction activity this week, the US Treasury will sell the regular 3- month and 6-month bills on Monday (19 May), and 4-week bills on Tuesday (20 May). The US Treasury will tap on its longer-dated bond auction market with the sale of 10-year Treasury Inflationprotected securities (TIPS) on Thursday (22 May).

______________________________________________________________________________________________________________________________________________________________ United Overseas Bank (Malaysia) Bhd. (271809K)

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UOB Economic-Treasury Research

Weekly Update Monday, 19 May 2014

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Commodities Global oil prices diverged again on Friday and this time US oil prices rebounded due renewed hope for US gasoline demand ahead of the looming US summer-holiday driving season and the ongoing Ukraine crisis while Brent futures edged lower on the return of Libyan supply to the market but it still held above US$109 as investors had an eye on the upcoming Ukraine elections. US Nymex futures rose by US$0.51 to close at US$102.02, while the London Brent oil futures retreated by US$0.69 to close at $109.75/bbl. This resulted in the premium spread narrowing to US$7.73 (from US$8.94 previously). Gold prices ended little changed on Friday. The gold price decreased by just US$0.20 and closed at US$1,293.40 on 16 May 2014. Economic News and Data US housing starts surged by 13.2%m/m to 1,072,000 units (from a revised 2.0%m/m at 947,000 units in March) while April building permits also grew by a better than expected 8%m/m to 1,080,000 units (up from a revised 1 million units in March, reinforcing expectations that 1Q housing weakness was weather-related and we are likely to see a better housing outlook in the coming months. However, the University of Michigan consumer sentiment data for May disappointed with a lower reading of 81.8, from 84.1 in April. Consensus forecast was for a slight improvement to 84.5. The Euro-zone March trade balance was a better than expected EUR 17.1bn (non-seasonally adjusted) well above February’s EUR 14.2bn and the forecast of EUR 16bn. The Swiss voters decided on Sunday (18 May) not to enact the world’s highest minimum wage and opposed the CHF3.1bn purchase of 22 new Saab AB fighter jets.

Asian Markets: Thailand’s 1Q14 GDP will be announced at SG time 10.30 am and is expected to grow by just 0.5% y/y vs 0.6% in 4Q13 as the political turmoil continues. Singapore’s final 1Q14 GDP will be out on Tuesday at 8 am and consensus is expecting an upward revision to 5.4% y/y (1.5% q/q saar) from the 5.1% y/y (0.1% q/q saar) in the advance estimates. Looking at the strength in the manufacturing sector in 1Q, we are more optimistic and we are penning a higher upward revision to 5.8% y/y. We will also have April CPI numbers on Friday, which we forecast will rise 3.5% y/y (compared to the 1.2% y/y seen a month ago), due mainly to the low base in April 2013 when the MAS car financing measures (introduced at the end of February 2013) caused a sharp decline in car sales volume as well as COE premiums. On Tuesday, Taiwan’s April export order is forecast to grow 5.2% y/y, moderating from 5.9% in March. Malaysia’s April CPI on Wednesday is expected to ease slightly to 3.4% y/y from 3.5% in March. The focus on Thursday will be China’s flash HSBC manufacturing PMI for May which is likely to remain in contraction (April: 48.1). Taiwan’s final 1Q GDP on Friday is expected to be little-changed from the prelim growth rate of 3.04% y/y. Central Bank The Bank of Japan (BOJ) is the only major central bank with a monetary policy decision this week on Wednesday (21 May) while the Bank of England will release its latest minutes later on the same day. Markets do not expect any change from the BOJ this week. Instead, we now expect the BOJ to act only in 3Q-2014 but we note that the longer the BOJ delays its additional easing further the more it will have to inject into the system (i.e. if not JPY 10 trillion today, then it will be JPY 20 trillion or more down the road.) The more important MPM decision that comes with an interim assessment of the economic outlook will take place later on 14/15 July [2014]. ______________________________________________________________________________________________________________________________________________________________ United Overseas Bank (Malaysia) Bhd. (271809K)

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UOB Economic-Treasury Research

Weekly Update Monday, 19 May 2014

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Equities Stock indexes in Asia were mostly higher over the last 5 trading sessions with gains led by India’s SENSEX index which ended up 4.9% over the period. BJP’s victory in India has spurred optimism for the economic growth. On Friday, Hang Seng Index and SHCOMP index ended flattish while the FSSTI fell 0.3%. Stock indexes in Malaysia, Thailand and Indonesia ended higher on Friday. Economic News Japan’s March final industrial production was revised higher to 0.7%m/m (7.4%y/y) from 0.3%m/m (7%y/y) previously estimated. Japan’s March capacity utilization grew by 0.4%m/m after a hefty 2.6% contraction in Feb. In India, Narendra Modi’s Bharatiya Janata Party garnered 282 of 543 parliamentary seats, more than the 272 needed to form a government. Sino-Vietnamese tensions remain high as China sent 5 ships to Vietnam to evacuate its nationals. Thailand’s Senate said on Friday it was ready to select an interim prime minister to end a political deadlock. This would replace the caretaker PM and lead to backlash by government supporters. Taiwan’s parliament has approved the increase in the highest income tax rate to 45% from 40%, starting next year. The revised income tax law also includes business tax hikes on banks and insurers as well as more tax deductions for low-income families, salarymen and the disabled. Hong Kong’s 1Q14 GDP was lower than expected at 2.5% y/y (Bloomberg: 3.0%) and moderated from the revised 2.9% in 4Q13. Malaysia’s GDP for the first quarter came in well-above consensus expectation at 6.2% y/y (Bloomberg: 5.7%; UOB: 5.5%) and accelerated from 5.1% in 4Q13. The exceptionally strong growth was driven by a sharp rebound in net exports and firmer domestic demand. Against the backdrop of higher inflationary pressure, we believe there will be a greater pressure for the central bank to raise interest rates at the next meeting on July 10.

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