Ahead Today
G3: US Retail Sales, US Industrial Production, US Capacity Utilisation, US NAHB Housing Index
Asia: Hong Kong Unemployment Rate
Market Highlights
Asian equities were set to open lower on Tuesday, anticipating interest-rate decisions from major central banks, including the Federal Reserve, later this week. While markets and ourselves are anticipating a 25bps Fed rate cut, Chair Powell’s press conference and communication on the rate path forward including through the dot plots will be much more important for markets. Overall, sentiment in the US remains relatively positive into the holidays, with a widely expected quarter-point rate cut from the Fed on Wednesday likely to provide fresh support and extend stock gains. This contrasts with Monday's losses in Asia, driven by weak data from China.
China's retail sales growth slowed unexpectedly in November, despite improvements in the housing market, highlighting the need for Beijing to boost consumer spending. Retail sales rose by 3% year-on-year, the slowest in three months and below forecasts. Industrial output increased by 5.4%, with manufacturing outperforming consumer spending. The weak consumption figures overshadowed positive signs in the property market, where price declines eased for the third month due to policy measures like lower transaction taxes. Home sales grew year-on-year in November for the first time since the economy reopened in early 2023 from COVID lockdowns, with floor space sold rising by 2.7% after a 1.8% decline in October.
Regional FX
Asian currencies were mixed to weaker, with IDR (-0.47%), KRW (-0.48%), and PHP (-0.75%) underperforming while USDCNH rose to 7.292. India’s goods trade deficit widened materially to US$37.8bn in November from US$27.1bn the previous month, the largest on record. The details showed this widening was to a large extent contributed by gold imports, with the gold trade deficit rising from US$6.5bn in October to US$14.5bn in November. Meanwhile, the oil trade deficit remained elevated at around US$12.3bn while the non-oil non-gold deficit widened as well to US$9.2bn from US$5.2bn. The good news is that India’s services trade balance rose to US$18.4bn from US$16.6bn, providing some partial offset to the much larger goods trade deficit. Overall, we are hesitant to extrapolate and say that India’s goods trade deficit will remain this large moving forward. For one, the oil deficit looks too large relative to where oil prices are right now. Second, while India’s gold import duty cuts have boosted gold demand more than we have anticipated, it’s unclear whether gold demand should continue at this same rate moving forward. Overall, we continue to see USD/INR rising steadily towards 85.2 by 1Q2025 and 86.0 by end-2025 given the less benign domestic growth and foreign portfolio inflow environment. With the larger trade deficit released, we are also watching out closely for whether USD/INR volatility picks up from here. Our base case is that RBI will continue to remain an important player in the market by intervening to cap realized FX vol, but the new RBI Governor coupled with a new look Monetary Policy Committee next year may raise some risk of a change in RBI’s FX intervention reaction function in 2025.
