Asia FX Talk - Concerning inflation lead indicator pickup

Ahead Today

G3: Eurozone Retail Sales, Germany Factory Orders

Asia: Philippines CPI , Taiwan CPI

Market Highlights

Yesterday’s strong bounce in the ISM Services PMI, and more importantly the spike in the Services Prices Paid sub-component is certainly concerning for continued disinflation in the United States. We note that the ISM Services Prices Paid indicator has a decent leading relationship with underlying services inflation in the US, and the survey suggests that there could have been some initial impact from the Red Sea disruptions built into the print. On that note as well, the Senior Loans Officer Survey released yesterday shows that lending standards are becoming less tight, notwithstanding recent stress in US commercial real estate.

The datapoints are noisy, but the culmination of data suggests a US economy which remains quite resilient, and perhaps with some chance for possible upside surprises in inflation moving forward. US 10-year yields spiked to 4.14%, while the US Dollar rose sharply by 0.5%. For the Dollar to trend meaningfully higher, we’ll probably also need sharp deceleration in global growth. This is not our base case, especially given the green shoots we’re seeing out of the tech and Asian export cycle thus far.

Regional FX

Asian FX was generally weaker on the back of the stronger Dollar, with THB (-1.5%) and MYR (-1%) underperforming. Bloomberg News reported that China is tightening trading restrictions on domestic institutional investors as well as some offshore units to help fight the fall in equity markets. These possible moves also come on the back of announcements such as a 50bps RRR cut, coupled with tapping state-owned offshore fund to support the stock market. China’s CPI and PPI inflation print out later this week could also raise further pressure for stimulus measures to support China’s economy. Philippines will release its CPI inflation print for January, which is expected to moderate to 3.1%yoy in part due to base effects. We think PHP will underperform Asian FX, but only modestly so, given its large current account deficit and still expensive FX valuations, which offsets lower inflation, rising FDI approvals, and improvements in domestic growth.