Daily BriefsMacro

Macro: Reflationary Decoupling and more

In today’s briefing:

  • Reflationary Decoupling
  • Singapore’s Strong Rebound Will Raise Inflation, Strengthening SGD in 2H 2021
  • FX Dashboard: LatAm FX Outperformance Versus Asia Did Not Last
  • Rates 10y Dashboard: Brazil Rates Lag the Currency’s Rally

Reflationary Decoupling

By Phil Rush

  • Surging US inflation arguably risks spilling over to Europe amid a high degree of co-movement between them, but the relationship can break up like it did in 2005-06.
  • The spillover of US reflation is likely to be incomplete, especially to the euro area, so relative price level hikes can be sustained for inflation-linked instruments, in our view.

Singapore’s Strong Rebound Will Raise Inflation, Strengthening SGD in 2H 2021

By Prasenjit K. Basu

Real GDP will likely grow 6.5% in 2021, pushing CPI inflation above 2%YoY by mid-year. The monetary stance will officially tighten (to “gradual appreciation of the S$NEER”) in October 2021. Given excess supply of residential and commercial property, we expect downward pressure on property prices, and hence recommend being Underweight Singapore equities, but long the SGD. 

Manufacturing production grew 11.1% YoY in 1Q 2021 (much faster than the 7.5% estimate in the Advance Estimate of GDP announced on 14 April), so real GDP is likely to have grown at least 1.2% YoY in 1Q 2021. Non-oil domestic exports (NODX) grew 9.7% YoY in 1Q 2021, the strongest in the last 4 quarters. Helped by the low-base (-13.3% YoY in 2Q 2020), real GDP is likely to grow at least 12% YoY in 2Q 2020, and a further 6% YoY in 2H 2021 — ensuring real GDP growth of 6.5% in 2021, faster than the official forecast of “4 to 6%” growth this year. 

The unemployment rate has fallen to 2.9% in March 2021, above the average of the past decade, but below the levels that prevailed in 1998-2001, 2003-06 and 2009. With tourism-facing sectors unlikely to restore jobs, the effective “full employment” level for the rest of the economy is an unemployment rate of 2.5%, which will be reached by mid-2021. CPI inflation is already at 1.3%, the highest since May 2017, and will likely exceed 2% YoY by June, and stay above those levels for the rest of 2021. We expect the S$NEER to trade at the top of its policy band (about 2% above this month’s level) by 3Q 2021, and the official policy stance to be amended to “gradual appreciation of the the S$NEER” at the next policy announcement in October 2021. 

The effective tightening of monetary conditions will be negative for the equity market. Excessive property supply will exert downward pressure on residential and commercial property prices, hurting prospects for the property sector. We recommend being long the currency (SGD) but underweight Singapore equities on a 6-9 month view. The setback to the leadership transition (with Heng Swee Keat stepping down as PM-in-waiting) is a medium-term concern. But Lawrence Wong as FM, with PM Lee continuing for longer, ensures policy continuity that will underpin the near-term growth outlook.  


FX Dashboard: LatAm FX Outperformance Versus Asia Did Not Last

By Gautam Jain, PhD, CFA

In this note, we compare the performance of Latin American and Asian currencies as the former had started outperforming earlier this month but the latter has since caught up. The performance gap between the two remains at its widest in 10 years.

Separately, the attached file is a snapshot of EM currency market, which we produce daily, and where we seek to identify the leaders and laggards among currencies by comparing the performance of each to its history as well as to other currencies based on their respective betas to the broad market.


Rates 10y Dashboard: Brazil Rates Lag the Currency’s Rally

By Gautam Jain, PhD, CFA

In this note, we look at the underperformance of Brazil’s long-end rates relative to the currency, which has rallied significantly of late. Instead of going long rates outright, given the risks, it is better to hedge the position with the currency in our view.

Separately, the attached file is a snapshot of EM 10y rates market, which we produce daily, and where 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 the broad market.


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