The slump in US non-farm payrolls on Friday sent jitters through Asia.
It’s one thing for American industry to enter a short-lived inventory correction, but it is quite another for job growth to stall. Yes, China this and that – but the world still needs the US consumer to do his duty. With things looking a lot dicier suddenly, will central bankers back-off tightening? This week will bring a crucial test of what they make of the soggy data. Watch what central banks in Australia, New Zealand, Korea, and Indonesia have to say. The BoK in particular is a close call, and its decision will set the broader tone for the region.
Let’s first take a snapshot of where we are. The global industrial cycle is going through a sharp inventory adjustment. In the US, production in the manufacturing sector has surged over the past six months or so, but consumers have not followed through as expected. As a result, American manufacturers are sitting on lots of unwanted inventory. The picture is similar, even if harder to quantify, in China and Europe.
Recent cut-backs have also been amplified by supply disruptions from Japan, with the global car and electronics sectors being especially exposed.
Strikingly, the impact has been uneven, with output being affected in the US, Thailand, and Taiwan much more than for example in Europe and Korea.
Still, Japan hit the global manufacturing sector at a particularly vulnerable time.
The good news, however, is that the inventory adjustment should fade relatively quickly. In fact, Japan itself should become a powerful force of industrial revival in the coming months as inventories there have been decimated since the tsunami struck and recent news suggests a far swifter production rebound than one dared hoped only a few short weeks ago.
Even in the US, the auto sector should begin to re-accelerate in the coming months, lending a broader boost to industrial production growth, while in China we remain confident that the current slowdown will prove temporary. Moreover, as the drag from the global inventory adjustment fades, stabilizing commodity prices, foremost oil, should support consumer demand. This is especially true in Western economies and in Japan, where higher energy prices have had an especially adverse effect on household sentiment and spending.
The risk with this story, however, is that the damage to the world economy may go beyond a mere inventory correction. For consumers to sustain spending increases – and, ideally, at an accelerated pace from the last six months – employment needs to rise also. That’s why the US payroll numbers sent an especially troubling signal. Still, a single data point is not a trend and there are plenty of reasons to expect an eventual stabilization of global growth once the temporary headwinds of an inventory correction, Japanese supply disruptions, and the drag from higher commodity prices wash through the system.
This, then, is how we see central banks line up over the course of this week. Apart from the Bank of Korea, no surprises appear likely. But, it will be especially useful to peruse statements to see whether central banks interpret the recent dataflow as a temporary blip or possibly something nastier.
– Tuesday: Reserve Bank of Australia to remain on hold – Paul Bloxham, HSBC’s chief economist, expects the central bank to holds its fire. First quarter GDP was clearly a disappointment, but this was largely due to natural disasters. In fact, domestic demand continued to grow at a brisk pace and officials remain optimistic about the fundamental outlook for the economy. Paul expects a hike in July or August.
– Thursday: Reserve Bank of New Zealand to remain on hold – After its 50bp emergency cut in March, the RBNZ appears in no mood to hike interest rates any time soon. Sure, the data-flow has improved of late, but the RBNZ had signaled only six weeks ago that the current monetary policy stance will “remain appropriate for some time”. Weaker data globally will not have changed the mind of officials. Paul expects a hike not before Q4.
– Thursday: Bank of Indonesia to remain on hold – With price pressures being surprisingly benign, and headline inflation rolling over of late, Wellian Wiranto, our chief economist for the country, expects BI to remain on hold for the time being. Although he still forecasts the central bank to raise rates by 50bp by year-end, weaker global data raises the possibility that BI may not move at all.
– Thursday: European Central bank and Bank of England to remain on hold – This call is uncontroversial enough. But, given soggy data of late, and signs that inflation may have stabilized in the Euro-zone, it will be interesting to see whether Trichet maintains his “strong vigilance”, which would signal a rate hike in July.
– Friday: Bank of Korea to raise rates by 25bp – This is a close call, and the decision that will matter most for regional sentiment. The global and local dataflow have weakened enough for the BoK to justify a continued pause after its surprise hold in May. However, rate normalization remains a pressing goal for the central bank, not least to stave off a further build-up of household debt. We come down on the side of a hike this time, but acknowledge that this is about as certain as flipping a coin. Given that Korea is an important bellwether for the regional economy, the BoK’s decision will set the tone for monetary policy developments in Asia more broadly over the coming months.
Overall, the weak payroll numbers on Friday are bound to reinforce caution among central bankers in Asia. Still, we don’t think the data justifies a pause, or even an end, to policy normalization. After all, most of the drags are bound to prove temporary and rates in Asia remain structurally far too low. But, central bankers may see something nastier on the horizon and opt to hold. This week will bring important clues as to what they are thinking.
HSBC Global Research
Let’s first take a snapshot of where we are. The global industrial cycle is going through a sharp inventory adjustment. In the US, production in the manufacturing sector has surged over the past six months or so, but consumers have not followed through as expected. As a result, American manufacturers are sitting on lots of unwanted inventory. The picture is similar, even if harder to quantify, in China and Europe.
ecent cut-backs have also been amplified by supply disruptions from Japan, with the global car and electronics sectors being especially exposed. Strikingly, the impact has been uneven, with output being affected in the US, Thailand, and Taiwan much more than for example in Europe and Korea. Still, Japan hit the global manufacturing sector at a particularly vulnerable time.
The good news, however, is that the inventory adjustment should fade relatively quickly. In fact, Japan itself should become a powerful force of industrial revival in the coming months as inventories there have been decimated since the tsunami struck and recent news suggests a far swifter production rebound than one dared hoped only a few short weeks ago.
Even in the US, the auto sector should begin to re-accelerate in the coming months, lending a broader boost to industrial production growth, while in China we remain confident that the current slowdown will prove temporary. Moreover, as the drag from the global inventory adjustment fades, stabilizing commodity prices, foremost oil, should support consumer demand. This is especially true in Western economies and in Japan, where higher energy prices have had an especially adverse effect on household sentiment and spending.
The risk with this story, however, is that the damage to the world economy may go beyond a mere inventory correction. For consumers to sustain spending increases – and, ideally, at an accelerated pace from the last six months – employment needs to rise also. That’s why the US payroll numbers sent an especially troubling signal. Still, a single data point is not a trend and there are plenty of reasons to expect an eventual stabilization of global growth once the temporary headwinds of an inventory correction, Japanese supply disruptions, and the drag from higher commodity prices wash through the system.
This, then, is how we see central banks line up over the course of this week. Apart from the Bank of Korea, no surprises appear likely. But, it will be especially useful to peruse statements to see whether central banks interpret the recent dataflow as a temporary blip or possibly something nastier.
– Tuesday: Reserve Bank of Australia to remain on hold – Paul Bloxham, HSBC’s chief economist, expects the central bank to holds its fire. First quarter GDP was clearly a disappointment, but this was largely due to natural disasters. In fact, domestic demand continued to grow at a brisk pace and officials remain optimistic about the fundamental outlook for the economy. Paul expects a hike in July or August.
– Thursday: Reserve Bank of New Zealand to remain on hold – After its 50bp emergency cut in March, the RBNZ appears in no mood to hike interest rates any time soon. Sure, the data-flow has improved of late, but the RBNZ had signaled only six weeks ago that the current monetary policy stance will “remain appropriate for some time”. Weaker data globally will not have changed the mind of officials. Paul expects a hike not before Q4.
– Thursday: Bank of Indonesia to remain on hold – With price pressures being surprisingly benign, and headline inflation rolling over of late, Wellian Wiranto, our chief economist for the country, expects BI to remain on hold for the time being. Although he still forecasts the central bank to raise rates by 50bp by year-end, weaker global data raises the possibility that BI may not move at all.
– Thursday: European Central bank and Bank of England to remain on hold – This call is uncontroversial enough. But, given soggy data of late, and signs that inflation may have stabilized in the Euro-zone, it will be interesting to see whether Trichet maintains his “strong vigilance”, which would signal a rate hike in July.
– Friday: Bank of Korea to raise rates by 25bp – This is a close call, and the decision that will matter most for regional sentiment. The global and local dataflow have weakened enough for the BoK to justify a continued pause after its surprise hold in May. However, rate normalization remains a pressing goal for the central bank, not least to stave off a further build-up of household debt. We come down on the side of a hike this time, but acknowledge that this is about as certain as flipping a coin. Given that Korea is an important bellwether for the regional economy, the BoK’s decision will set the tone for monetary policy developments in Asia more broadly over the coming months.
Overall, the weak payroll numbers on Friday are bound to reinforce caution among central bankers in Asia. Still, we don’t think the data justifies a pause, or even an end, to policy normalization. After all, most of the drags are bound to prove temporary and rates in Asia remain structurally far too low. But, central bankers may see something nastier on the horizon and opt to hold. This week will bring important clues as to what they are thinking.The slump in US non-farm payrolls on Friday sent jitters through Asia.
It’s one thing for American industry to enter a short-lived inventory correction, but it is quite another for job growth to stall. Yes, China this and that – but the world still needs the US consumer to do his duty.
With things looking a lot dicier suddenly, will central bankers back-off tightening? This week will bring a crucial test of what they make of the soggy data. Watch what central banks in Australia, New Zealand, Korea, and Indonesia have to say. The BoK in particular is a close call, and its decision will set the broader tone for the region.
Let’s first take a snapshot of where we are. The global industrial cycle is going through a sharp inventory adjustment. In the US, production in the manufacturing sector has surged over the past six months or so, but consumers have not followed through as expected. As a result, American manufacturers are sitting on lots of unwanted inventory. The picture is similar, even if harder to quantify, in China and Europe.
ecent cut-backs have also been amplified by supply disruptions from Japan, with the global car and electronics sectors being especially exposed.
Strikingly, the impact has been uneven, with output being affected in the US, Thailand, and Taiwan much more than for example in Europe and Korea.
Still, Japan hit the global manufacturing sector at a particularly vulnerable time.
The good news, however, is that the inventory adjustment should fade relatively quickly. In fact, Japan itself should become a powerful force of industrial revival in the coming months as inventories there have been decimated since the tsunami struck and recent news suggests a far swifter production rebound than one dared hoped only a few short weeks ago.
Even in the US, the auto sector should begin to re-accelerate in the coming months, lending a broader boost to industrial production growth, while in China we remain confident that the current slowdown will prove temporary. Moreover, as the drag from the global inventory adjustment fades, stabilizing commodity prices, foremost oil, should support consumer demand. This is especially true in Western economies and in Japan, where higher energy prices have had an especially adverse effect on household sentiment and spending.
The risk with this story, however, is that the damage to the world economy may go beyond a mere inventory correction. For consumers to sustain spending increases – and, ideally, at an accelerated pace from the last six months – employment needs to rise also. That’s why the US payroll numbers sent an especially troubling signal. Still, a single data point is not a trend and there are plenty of reasons to expect an eventual stabilization of global growth once the temporary headwinds of an inventory correction, Japanese supply disruptions, and the drag from higher commodity prices wash through the system.
This, then, is how we see central banks line up over the course of this week. Apart from the Bank of Korea, no surprises appear likely. But, it will be especially useful to peruse statements to see whether central banks interpret the recent dataflow as a temporary blip or possibly something nastier.
– Tuesday: Reserve Bank of Australia to remain on hold – Paul Bloxham, HSBC’s chief economist, expects the central bank to holds its fire. First quarter GDP was clearly a disappointment, but this was largely due to natural disasters. In fact, domestic demand continued to grow at a brisk pace and officials remain optimistic about the fundamental outlook for the economy. Paul expects a hike in July or August.
– Thursday: Reserve Bank of New Zealand to remain on hold – After its 50bp emergency cut in March, the RBNZ appears in no mood to hike interest rates any time soon. Sure, the data-flow has improved of late, but the RBNZ had signaled only six weeks ago that the current monetary policy stance will “remain appropriate for some time”. Weaker data globally will not have changed the mind of officials. Paul expects a hike not before Q4.
– Thursday: Bank of Indonesia to remain on hold – With price pressures being surprisingly benign, and headline inflation rolling over of late, Wellian Wiranto, our chief economist for the country, expects BI to remain on hold for the time being. Although he still forecasts the central bank to raise rates by 50bp by year-end, weaker global data raises the possibility that BI may not move at all.
– Thursday: European Central bank and Bank of England to remain on hold – This call is uncontroversial enough. But, given soggy data of late, and signs that inflation may have stabilized in the Euro-zone, it will be interesting to see whether Trichet maintains his “strong vigilance”, which would signal a rate hike in July.
– Friday: Bank of Korea to raise rates by 25bp – This is a close call, and the decision that will matter most for regional sentiment. The global and local dataflow have weakened enough for the BoK to justify a continued pause after its surprise hold in May. However, rate normalization remains a pressing goal for the central bank, not least to stave off a further build-up of household debt. We come down on the side of a hike this time, but acknowledge that this is about as certain as flipping a coin. Given that Korea is an important bellwether for the regional economy, the BoK’s decision will set the tone for monetary policy developments in Asia more broadly over the coming months.
Overall, the weak payroll numbers on Friday are bound to reinforce caution among central bankers in Asia. Still, we don’t think the data justifies a pause, or even an end, to policy normalization. After all, most of the drags are bound to prove temporary and rates in Asia remain structurally far too low. But, central bankers may see something nastier on the horizon and opt to hold. This week will bring important clues as to what they are thinking.