Ahead Today
G3: US Personal spending, US PCE Inflation
Asia: India GDP, Philippines trade deficit
Market Highlights
President Trump said that the 25% tariffs on Canada and Mexico are on track to go into place on 4 March, and that he would impose an additional 10% tax on China, presumably on top of the 10% already imposed from February. In his social media post, Trump said that the tariffs are linked to drug trafficking and illegal immigration, with Trump citing high levels of drug imports from Canada and Mexico, and China’s role in the fentanyl trade. There are nonetheless hopes that a deal could possibly be reached before 4 March, assuming Trump’s demands are eventually met.
The market reaction was reasonably strong overnight, with the Dollar strengthening by 0.85%, risk assets including the S&P500 falling by more than 1.5%, and US 10-year yields declined further to 4.25%, even as markets continue to live with the uncertainty and whiplash of the multitude of tariff proposals in the pipeline. Asian currencies and risk assets also reacted accordingly, with USD/CNH rising to 7.299, and the higher beta and more export-oriented likes of KRW, THB and SGD underperformed.
It’s important to note that the transmission mechanism to Asia of higher US tariffs on Mexico, Canada and China are multi-faceted. For one, up to 25% tariffs if sustained would imply a meaningful growth slowdown in the US and China, and also most certainly in Mexico and Canada, thereby also impacting the export-oriented Asian economies more. Second, with all three countries making upwards of 50% of the US’ imports of products such as toys and sports equipment, autos, furniture, minerals, lumber and vegetable products, inflation pressures in the US are likely to rise due to the lack of available substitutes, even as some countries such as Vietnam, India, and Malaysia may benefit from some substitution effects in the near-term.
Third, a subtle point, but important point is through indirect supply chain channels. Our analysis of Global Input Output tables show that Asian countries have been increasing their indirect supply chain linkages through Mexico since 2017, with Taiwan for instance exporting 0.9% of its GDP indirectly through Mexico’s gross exports to the US, up from 0.5% of GDP in 2017. Some of this reflects increased near-shoring of supply chains for instance for Taiwanese and South Korean semiconductor companies, while some of this may also indicate increased backward linkages in the automobile sector, with Malaysia and Singapore exporting more chips to fulfil auto demand. In other words, what happens in Mexico will not just stay in Mexico
Regional FX
Asian currencies traded with a negative bias with USD/CNH rising to 7.299 from the 7.25 handle previously, while KRW (-1.3%), THB (-1.1%), SGD (-1.1%) and IDR (-0.6%) underperformed. The threat of meaningful tariffs are certainly one key element, and over here it’s also important to point out that other countries including China are also responding through a mix of retaliation and negotiation. On that front, Bloomberg News reported that India’s officials are exploring ways to lower tariffs on a wide range of imports, including cars, chemicals, critical pharmaceuticals and some agricultural products, in order to help evade Trump’s threatened reciprocal tariffs. These proposals would go much further than previous tariff reductions already unveiled, including on the likes of high end motorcycles and bourbon whiskey. The hope is that these moves will ultimately help India close a trade deal with the US by autumn, a timeline set during the recent Modi-Trump summit in the US earlier this month.
Meanwhile, fiscal maneuvers by the Prabowo administration have – rightly or wrongly – increased jitters among foreign investors, and have likely also contributed to IDR’s underperformance on top of global factors such as tariffs. These policy changes include the launching of Indonesia’s new sovereign wealth fund Danatara to help serve as an investment vehicle and holding company for state-owned enterprises, together with Bank Indonesia’s new plan to buy bonds issued by the government to fund its housing programme. Bank Indonesia already plans to purchase more than US$9bn of government bonds this year in part to replace some of the existing bonds maturing off its balance sheet, while it said that it would buy the newly announced property-linked debt in the secondary market. Given how USD/IDR has been moving closer to 16,450, and 1 month NDF closer to 16,561, it maybe difficult for BI to signal rate cuts at least in the near-term.
