Guide to the Markets
We are pleased to present 3Q19 Guide to the Markets. The Guide contains analysis of economic and market data through June 30, 2019, which presents a wide range of macroeconomic data which can help short-term fixed income investors assess market risks and position portfolios in the coming quarter. Highlights include:
- Key interest rates including Shibor, Treasury bills and policy bank bond yields were all moving higher in April before stabilizing in May and June, meanwhile repo rates remained relatively stable supported by adequate market liquidity. The People’s Bank of China (PBoC) left the reserve requirement ratio and key quasi-monetary policy interest rates unchanged during the period, but did inject a significant quantity of liquidity to support economic growth.
- First quarter gross domestic product (GDP) printed at a better than expected 6.4% year-over-year (y/y) while positive monetary and fiscal stimulus tailwinds supported good economic growth in April with fixed asset investment, industrial production and retail sales all registering improvements. However, economic momentum in May and June decelerated again as escalating trade tensions weighed on domestic sentiment and demand. Meanwhile, higher food prices throughout the quarter pushed headline inflation to a 15-month high.
- PBoC comments at its quarterly meeting highlighted the dilemma between keeping interest rates low to support growth while also controlling leverage and preventing excessive systemic risk. Given this trade-off, we expect the central bank to keep interest rates unchanged and liquidity adequate for the foreseeable future.
- Short-term interest rates declined sharply and the yield curve inverted during the second quarter as investors’ expectations of central bank rate cuts intensified. The Reserve Bank of Australia (RBA) delivered two 25bps rate cuts in less than one month (at its 4 June meeting and 2 July meeting); bringing the cash rate to a new record low of 1.00%.
- Economic growth remained subdued with 1Q19 GDP printing at a decade low of 1.8% y/y as positive trade and government spending failed to offset slower household consumption. Despite positive job creation during the quarter, the unemployment rate edged up from its February 2019 low. The housing market remained in the doldrums with building permits, home loans and house prices all declined to new cycle lows. Finally, first quarter inflation declined to a 2.5-year low of 1.3% y/y on muted transport and housing costs. With inflation below its target range, the RBA has shifted focus to the labour market as a key metric for future monetary policy decisions.
- Short-term interest rates continue to trend downwards as a combination of dovish central bank comments and continued weakness in housing, wages and inflation have encouraged investors to anticipate at least one additional, imminent rate cut.
- Short-term interest rates trended up in April and May, before declining sharply in June as the drag of lower U.S. Libor rates offset tight local liquidity conditions. At its semi-annual policy meeting in April, the Monetary Authority of Singapore (MAS) switched from a hawkish to a neutral policy bias, maintaining the current rate of appreciation of the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) while leaving the width and centre point of the band unchanged.
- S$NEER remained close to the upper end of its trading range throughout the quarter. Economic growth was fragile during the quarter, with 1Q 2019 GDP printing at a decade low of 1.2% y/y as stronger services and constriction failed to offset sluggish manufacturing and export sectors. Declining Purchasing Managers’ Index and industrial production data echoed the challenges from the escalating global trade tensions. Domestic demand and inflation also remained moribund during the quarter.
- The MAS acknowledged the negative impact of slower trade and weaker domestic demand in its annual report—which was downbeat with indications that official growth and inflation estimates could be revised even lower. The strong correlation with U.S. Libor rates suggests Singapore Swap Offer Rates (SOR) could trend down further, although any decline in the S$NEER as investors anticipate a more dovish central bank should close the SOR/Libor gap further.
As you consider these important topics, your Global Liquidity Client Advisor will be happy to share our market views and tailor liquidity solutions to best meet your needs.