Daily BriefsMacro

Macro: ASEAN as Epicentre of the Covid Crisis: Malaysia Worst Off and more

In today’s briefing:

  • ASEAN as Epicentre of the Covid Crisis: Malaysia Worst Off, Indonesia Improving
  • TMI Snapshot:  Asynchronous Inflation Narratives
  • Rates 10y Dashboard: Attractive Yield Pick-Up of EM Local Debt over DM

ASEAN as Epicentre of the Covid Crisis: Malaysia Worst Off, Indonesia Improving

By Prasenjit K. Basu

While the US was the epicentre of the world’s first Covid wave (peaking in January 2021), and India the second (peaking in early-May 2021), the epicentre of the current third global Covid wave is ASEAN. While Indonesia was initially the worst hit, this wave has spread to Malaysia, Thailand and Vietnam (the latter two among the most successful in combatting Covid in 2020), with some scares in Singapore and the Philippines as well. ASEAN’s real GDP is estimated to have grown over 10% YoY in 2Q 2021 (helped by a very depressed base from 2Q 2020) but the renewed Covid surge is set to weaken the economic recovery in 2H 2021. 

In July 2021, Indonesia has had more new Covid cases than any other nation globally. But the worst of Indonesia’s Covid wave was reached on 18 July 2021 (at a 7-day moving average of 50,039 new daily infections), and these have since receded by nearly a fifth. The biggest hit will occur in 3Q 2021 growth, but Indonesia’s real GDP should exceed 6% YoY in 4Q 2021, bringing full-year growth to about 5%. The worst-hit ASEAN economy (and polity) is Malaysia, where there have been 3 successive Covid waves in 2021, the last of which has not yet reached its peak. Consequently, the greatest economic and political uncertainty in 2H 2021 will be in Malaysia, which has the highest per capita Covid case load in South or South-east Asia (at 31,334 cases per million population). We expect real GDP to grow no more than 3% YoY in 2H 2021 despite a low base. 

Thailand and Vietnam, both extremely successful in containing Covid in 2020 (although Thailand’s tourism-dependent economy nonetheless suffered a severe hit from the drying-up of tourist arrivals) are now seeing their first wave of Covid infections, in July 2021. The peak of the current Covid wave is not yet detectable in either country. Vietnam’s Covid wave is concentrated in the south (Ho Chi Minh City and surrounding provinces), but Thailand’s is concentrated around the main economic centre, Bangkok, and its surrounding provinces. However, the base effect is more helpful in Thialand than Vietnam (the latter having continued to grow in all four quarters of 2020), so we expect Vietnam’s real GDP to grow 5% YoY and Thailand’s 5-6% YoY in 2H 2021. Despite a major alarm being raised in Singapore as well, the latest Covid wave is very mild in the island-republic, and real GDP in Singapore is consequently likely to grow 7.2% in 2021.  

TMI Snapshot:  Asynchronous Inflation Narratives

By Elan Gore

  • This year’s narrative from US treasuries suggests a short-lived inflation/overheating scare in Q1, which coincided with Winter Storm Uri and the Texas power crisis, along with an initial phase of tapering talk from regional Fed presidents which subsequently faded; since the March peak, 10yr yields are down -45bps or a whopping -26%, representing the view that inflationary pressures have been entirely transitory
  • The picture from 5yr TIPS breakevens and the 5yr5yr has been more closely attuned to commodities:  In the past 6 months, 5yr TIPS breakevens and 5yr5yr have been 74% and 70% correlated with copper prices vs. the 10yr yield’s 46%, though correlations with oil have been low; breakevens peaked with copper in May and bottomed in June-July
  • While 10yr yields continued to grind lower in July, our text mining is picking up a new surge in reports of supply constraints, which have been strongly correlated with breakevens and reflect corporate commentary in the current earnings season
  • The inflation narrative from treasuries appears to be asynchronous with the Q2 earnings season narrative from cyclical corporates, who are uniformly reporting worsening raw materials inflation expected in Q3 and lingering supply constraints
  • Nonetheless, our text mining acknowledges that talk of tightening financial conditions last spiked in March and has not resurfaced since, and expectations of a massive US infrastructure package have faded

TMI Data Science utilizes Natural Language Processing to build custom leading indicators using unstructured data sourced from the global financial, trade & traditional media. Our proprietary software text-mines the global media to discern and quantify nuanced qualitative shifts in press coverage as they apply to macroeconomics, equity indexes/ETFs, commodities, currencies, fixed income & individual equities. 

Rates 10y Dashboard: Attractive Yield Pick-Up of EM Local Debt over DM

By Gautam Jain, PhD, CFA

US rates volatility has picked up again and is close to the highs of the year despite the US 10y yield dropping. With rising US rates volatility, the EM-US 10y spread is now close to its widest in 5 years, suggesting that if US long-end rates stay low then EM local debt can start attracting inflows. We use two factors to identify some of the countries that may be targeted for inflows.

Separately, the attached file is a snapshot of the EM 10y rates market in which we seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to an EM rates index.

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