Francis Tan
[email protected] Global Economics & Markets Research Email:
[email protected] URL: www.uob.com.sg/research
Flash Notes
Thursday, 13 April 2017
Singapore: MAS Maintains Neutral SGD NEER Policy Stance And Hints That It Is Also For An Extended Period
As expected, the Monetary Authority of Singapore (MAS) this morning had maintained the current policy of a zero appreciation of the SGD NEER for the 3rd policy meeting (since April 2016), and had also kept the midpoint and bandwidth of the policy band unchanged.
MAS believe that current neutral SGD NEER policy is deemed appropriate for an extended period of time. By keeping the word “extended”, the MAS signals that it is not too comfortable about the recent strength in the SGD NEER. Without utilizing any shifts in the mid-point, this is an elegant way, via forward guidance, to signal their dovish intentions to the market. We now believe the central bank will also keep to the existing policy stance in the October 2017 meeting, unless actual economic conditions turn out drastically different from their forecast.
We are thus not too bullish on the SGD NEER in the 6-month horizon and market may start trading the SGD NEER lower. With that, we maintain our USD/SGD forecast of 1.46 by end 2017, and GDP growth forecast of 2.4%
MAS Maintains Policy Stance of Neutral SGD NEER
As expected, the Monetary Authority of Singapore (MAS) this morning had maintained the current policy of a zero appreciation of the SGD NEER for the 3rd policy meeting (since April 2016), and had also kept the midpoint and bandwidth of the policy band unchanged. More importantly, the MAS had kept the word “extended” in their statement “a neutral policy stance is appropriate for an extended period and should ensure medium-term price stability”. This signals that the central bank will keep its current dovish policy stance even in the upcoming October 2017 meeting and deems that recent increases in core inflation will remain capped.
Exhibit A: SGD NEER Trading Above the Midpoint 93% of the Time Since Start of 2017 Source: Bloomberg, UOB Global Economics & Markets Research Estimate 129 127
Easing Round 1 MAS shifted SGD NEER slope from 2% to 1% in an off-cycle decision
Easing Round 2
Easing Round 3
MAS shifted SGD NEER slope from 1% to 0.5%
MAS shifted SGD NEER slope to Neutral
MAS kept neutral stance unchanged in Oct 16 and Apr 17 meetings
125
In our MAS Policy Preview report 123 SGD NEER was (Singapore MAS Policy Preview: No trading above Change To April Decision, But Current midpoint 93% of 121 the time since Neutral Slope Losing Relevance, 6 Jan 2017 April 2017), we discussed how the economic landscape had changed over 119 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 the past six months since the last MAS SGD NEER Upper-end: 2% policy meeting. Back then, we were Mid-Point of Estimated Policy Band Lower-end: 2% very concerned about the deflationary environment, slow economic growth, rising labour redundancies and industry-specific risk factors such as from the offshore & marine industries.
Although Economic Activities Picked Up, MAS Remains Cautious And Dovish
Fast forward a few months later, Singapore’s 4Q 2016 GDP growth surprised analysts on the upside with a stronger 2.9% y/y growth, and the advance estimates of 1Q 2017 GDP growth (released today) was also at a strong 2.5% y/y. Moreover, core inflation had been trending higher, while the central bank had also set their 2017 core inflation forecast at 1-2%, higher than the average 0.9% in 2016.
Flash Notes Thursday, 13 April 2017
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As Singapore moves into the reflationary stage of the business cycle, we had thought that it would be prudent for the MAS to start signaling a shift into a mild appreciation of the SGD NEER slope in the October meeting by leaving the word “extended” out in today’s statement. However, the MAS cautioned that it could be too early to do so as the recent stronger economic activities is uneven (mainly from the tradeable sectors) and downside risks from significant policy uncertainty remains. Moreover, higher core inflation was due to higher prices of oil-related items and would be capped by elevated oil inventories as well as rising US crude oil production. Additionally, the MAS also cautioned that since labour market conditions have slackened, it will dampen underlying wage pressures, even as commercial and retail rents have eased further. CPI pass through will also be limited due to the lackluster economic environment.
Recent Strength of SGD NEER Was Probably Uncomfortable For MAS
In their report today, the MAS said that since the last policy review in October 2016, the SGD NEER has “fluctuated around a strengthening trend, appreciating from below the mid-point of the policy band to the upper half of the band. The appreciation from late February 2017 reflected, in part, broad-based US dollar weakness.” As such, without resorting to using shifts in the mid-point to weaken the SGD NEER, the MAS adopted an elegant way, via forward guidance, to signal its intentions by keeping the powerful word “extended” in its policy statement. Indeed, our UOB SGD NEER model showed that the SGD NEER had been in the upper half of the policy band for 93% of the time since the start of this year (EXHIBIT A). In conclusion, the MAS had hinted strongly about the longevity of the current neutral SGD NEER stance by keeping the word “extended” in the statement “a neutral policy stance is appropriate for an extended period and should ensure medium-term price stability”. Unless the economic conditions change drastically and beyond the central bank’s expectation over the next 6 months, this will mean another status quo in the October 2017 policy meeting.
FX Views
With that, we are not too bullish on the SGD NEER over the upcoming 6-month horizon and market may start trading the SGD NEER lower. With that, we maintain our USD/SGD forecast of 1.46 by end 2017. The USD/SGD hit a low of 1.3941 during Sydney hours but has since rebounded after MAS statement (at 1.3970 as of 8:10am). MAS decision is line with market’s expectation and the main driver overnight is due to Trump’s comments about “USD is getting too strong”.
Rates Views
The “hawkish” MAS is fully priced going into this meeting. Selling on the fact implies mean reversion of the SGD NEER back towards mid-point in the coming days. We feel that USD upside catalysts have been dragging its feet and that SGD upside catalysts are also less immediate after the event. One cancels the other to some extent. Mean reversion in SGD NEER may pressure SOR fixings higher in the next few days. However, we think that this should be transitory and not the start of a sustainable trend. The discount in USDSGD FX swaps remains within historical (since 2003) ranges. It is trading currently on the tighter end, therefore limiting scope for significantly higher SORs (independent of FED hike).
Advance 1Q 2017 GDP: Growth Supported By Manufacturing
Singapore’s advance estimates of 1Q 2017 GDP growth registered 2.5% y/y, slightly better than consensus estimates of a 2.4% y/y growth. On a q/q SAAR basis, GDP pulled back 1.9%. The sequential slowdown in 1Q GDP growth was mainly due to the 6.6% q/q SAAR contraction in the manufacturing sector, as well as a 2.2% q/q SAAR contraction in the services sector. Sequential slowdown in the manufacturing sector is not a surprise since it gained sharply (+39.8% q/q SAAR) in 4Q 2016. The construction sector grew 5.4% q/q SAAR. On the y/y basis, the manufacturing sector continued to perform well by expanding 6.6%. The Ministry of Trade and Industry (MTI) reported that growth was mainly support by robust expansions in the electronics and precision engineering clusters, which outweighed declines in the biomedical manufacturing, transport engineering, and general manufacturing clusters. The construction sector remained weak and contracted 1.1% y/y, marking the 3rd quarter of consecutive y/y decline. Meanwhile, the services sector picked up and expanded 1.5% y/y, from 1.0% y/y in 4Q 2016.
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Our View: Supportive Policies Needed As Growth Is Uneven
From the 1Q GDP numbers, it is evident that the reflationary story is only benefiting pockets of the economy. As such, stimulus from both the fiscal and monetary policies is much needed to ensure a more broad-base recovery for Singapore’s economic stakeholders. The MAS may need to observe a stronger recovery in the other clusters in the manufacturing sector, as well as the services sector, before resuming a more hawkish monetary policy stance. Our MAS policy preview report has shown that benign domestic consumption (a contraction of 2.3% y/y in 4Q 2016, and the first time since the GFC) that resulted from a weak labour market will mean that policy support is needed. We maintain our 2017 GDP growth forecast of 2.4%.
Disclaimer: This analysis is based on information available to the public. Although the information contained herein is believed to be reliable, UOB Group makes no representation as to the accuracy or completeness. Also, opinions and predictions contained herein reflect our opinion as of date of the analysis and are subject to change without notice. UOB Group may have positions in, and may effect transactions in, currencies and financial products mentioned herein. Prior to entering into any proposed transaction, without reliance upon UOB Group or its affiliates, the reader should determine, the economic risks and merits, as well as the legal, tax and accounting characterizations and consequences, of the transaction and that the reader is able to assume these risks. This document and its contents are proprietary information and products of UOB Group and may not be reproduced or otherwise. Singapore Company Reg No. 193500026Z
Flash Notes Thursday, 13 April 2017
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Scheduled Meeting?
yes
yes
yes
yes
no
yes
yes
yes
yes
yes
Date
12 Apr-13
14 Oct-13
14 Apr 14
14 Oct 14
28 Jan 15
14 Apr 15
14 Oct 15
14 Apr 16
14 Oct 16
13 Apr 17
no changes to neutral slope and band width
no changes to neutal slope and band width
slope lowered to 0%, band width unchanged
lowered slope by 0.5% to 0.5%
no change to slope bias
lowered slope by 0.5% to 1.0%
no change to slope bias
no change to slope bias
no change to slope bias and band width
slope unchanged at 2.5% (estimate), band width unchanged
Bias
Decision
Uncertainties of full impact of Brexit and upcoming elections in U.S. External demand is picking up benefiting mainly Singpaore's tradeable sectors
no change to midpoint
Still-weak global economic conditions
no change to midpoint
no change to midpoint
Turmoil in financial markets since China’s Aug devaluation added on to global recession risks
Weak external growth environment persisted. China slowdown causing concerns
The global economy continues to grow at an uneven pace across countries, with stronger growth in the US partly offset by weakness in the Eurozone, Japan, and China.
US economy to lead global economy but growth in the core Eurozone economies and Japan is likely to remain weak, hampered by structural headwinds.
improving economic conditions in US, Eurozone and Japan. Emerging Asia growth remains robust
no change to midpoint
no change to midpoint
no change to midpoint
no change to midpoint
no change to mid point
stronger regional economic growth, improving PMI numbers and confidence levels
recovery in G3, pickup in housing/private demand in US, Japan monetary stimulus, robust Chinese demand
no change to mid point
no change to mid point
External Econ
Pivot Point
Labour Mkt tighter labour market due to foreign labour restrictions
higher foreign workers levies, new rules on employment pass applications. Tight labour market labour market remains very tight with latest job vacancy-to-unemployed ratio at 1.44. Wages to continue to rise, particularly in the services sector continues to remain tight, particularly in the services sector
Tight labour market have remained, but pass-through to CPI has been slightly weaker than anticipated.
Labour market remains tight
Labour market remains tight
Labour market still tight, however, there are risks of higher labour redundancies in 2016 Slight loosening in labour market as redundancies edged higher in recent 2 quarters Looser labour market conditions will cap supply-side cost increases
Domestic Inflation declining but with upside risks coming from wage increase pressures, lowered headline and core inflation estimate eased for both accomodation and private transportation costs. But the latter has risks of trending higher both accomodation and transport costs had eased. However, risks of higher transport costs to come from low base in 2013 and higher COE premiums in 2014 With the economy at full employment, wages should continue to increase and filter through to prices particularly for services items
While domestic cost pressures will remain, the pass-through to consumer prices is expected to be moderate.
Cost pass-through from higher domestic cost is not evident. Mark ups by firms are not significant Cost pass-through from higher domestic cost is not evident. Mark ups by firms are not significant Prices of cars and housing remain low, but risks of inflation moving higher due to base effects. 2016 core inflation likely at lower half of 0.5-1.5% Prices of cars and housing remain in contraction but y/y growth risks moving higher due to base effects Prices of cars and housing remain in contraction and rising core inflation strength will be capped
Imported Inflation generally mild in recent months and projected to lower due to supply buffers in energy and food declining but with upside risks coming from wage increase pressures stable food and oil prices and an appreciating SGD NEER will result in low imported inflation
Imported food inflation due to higher food cost. Subdued external price pressures due to ample supply buffers in the major commodity markets. Imported inflationary pressures are receding, with global oil prices likely to stay subdued this year.
Depreciation in currencies of several importing nations depressed imported inflation Depreciation in currencies of several importing nations depressed imported inflation Weakness in imported inflation due to contraction in factory prices and low commodity prices No risk in imported inflation
Not a major risk, but looks to be rising as China PPI & oil prices gained in recent months
Domestic Econ gradual improvement for the rest of the year on the back of external demand recovery consistent recovery expected in manufacturing sectors with strong contributions from services sectors cyclical demand pickup is expected in externallyoriented industries in 2014 and positive spillovers to benefit domestic sectors
The continued improvement in global demand should provide some support to the externaloriented sectors of the Singapore economy. Mixed outlook for the global economy weigh on the external-oriented sectors; domestic-oriented sectors should stay resilient. 2015 growth remains at 2–4%.
Slowest economic growth (in 2Q) in nearly three years Very weak manufacturing sector that contracted for four consecutive quarters on-year Slowest economic growth in 2015 since 2008/09 recession, 1Q16 GDP grew 0% q/q SAAR Headwind from the slowdown in services sector
Growth in services sector still slow, hampered by weak domestic consumption
Global Electronics improving trend in US SemiBook-to-Bill ratio
first drop below parity in US Semi Book-toBill ratio since start of 2013 semiconductor sales projected to grow strongly in Americas and Europe
na
na
Weak growth in semiconductor demand Weak growth in semiconductor demand
improvement in US Semi Bookto-Bill ratio
improvement in US Semi Bookto-Bill ratio
Double digit growth in semiconductor production
Factors /Outlook Affecting Decision
ANNEX B: Announced MAS Monetary Policy Statements / Actions Since 2013
