Weekly: Mood swings

A market exhausted from August’s ups and downs has found five sources of relief in the early days of September.
Taimur Baig, Ma Tieying06 Sep 2019
  • However, positive news out of China, Hong Kong, Italy, UK, and the US could easily fade
  • The frenzy of flight to safety and negative yields could be ending
  • Surging US wages and labour cost data are being ignored
  • Considerable volatility in the fixed income market could ensue
Photo credit: AFP Photo

What goes up…

A market exhausted from August’s ups and downs has found sources of relief in the early days of September. So far this week, five important developments have helped:

China: Better than expected activity report, in the form of Caixin services PMI for August, broke a string of underwhelming data. The PMI report’s job creation component was encouraging in particular, which helped assuage concerns about the ongoing slowdown in the world’s most populous economy.

Hong Kong: Chief Executive Carrie Lam stated earlier this week that the controversial extradition bill that had sparked this summer’s protests will be withdrawn. Additionally, reports emerged that Chinese Vice President Wang Qishan has played a key role in helping matters.

Italy: A highly volatile political crisis that brought the government close to a collapse last month was resolved this week as PM Conte put together a new cabinet with representatives from the left and right.

UK: Signs emerged this week, amid numerous parliamentary manoeuvres and votes, that the October 31 Brexit cliff-edge (deal or no-deal Brexit, as vowed by PM Johnson) will likely be avoided.

US: In contrast to the poor manufacturing PMI, ADP data released this week show that jobs growth picked up strongly in July, in both manufacturing and services. The ISM non-manufacturing reading was also positive.

We will urge caution against this backdrop. In each of these developments, there was little by way of conclusive resolution. Let’s begin with China, where manufacturing and sales data remain poor. Even the Caixin report that pleased the markets shows export orders pulling back. For the all the talk of trade talks resuming in October, the fact remains that tariffs were raised further just a few days ago. China’s headwinds remain considerable.

In Hong Kong, it is yet to be seen if the extradition bill’s withdrawal will be sufficient to stem fomenting discontent. While the bill’s introduction was the trigger that sparked the protests, it is clearly understood that grievances run deep and wide.

Italy’s new coalition is fledgling at best; questions remain if an alliance between traditional antagonists (the populist Five Star and centre-left Democratic Party) will hold for more than a year.

In the UK, many pitfalls lie ahead. PM Johnson could choose to ignore the bills passed by the opposition to force the October 31 Brexit deadline; he could even bring a no-confidence motion (which requires a simple majority to pass) against his own government to ensure an election before October 31.

Finally in the US, good data may well be bad news for the markets. Several regional governors are against further monetary accommodation at this juncture, although markets are convinced from recent observations made by Chair Powell and New York Fed president Williams that another rate cut is around the corner and there will be even more before the year is over. In this politically charged environment, and rising nervousness about the global economic outlook, the Fed’s position is increasingly tenuous. As markets rally in expectation of a trade deal and jobs data remain strong, the inclination to provide immediate accommodation recedes, but a Fed pause in September will shock the markets. The Fed may well be hostage to that risk.

We also hope that in the middle of flight to safety, negative yields, inverted curves, and stable core PCE inflation, Fed officials take note of other compelling data that show that wages and costs are rising. Latest productivity data from the Bureau of Labour Statistics show that hourly compensation has surged this year, pushing up unit labour costs. Under ordinary circumstances, this report alone would set off warning bells of incipient inflationary pressure. We would at least hope Fed communication picks this up later this month. But if it does indeed do that, the markets (not to mention President Trump) will be highly displeased. Mood swings are likely to be par for the course.

To read the full report, click here to Download the PDF.

Taimur Baig, Ph.D.

Chief Economist - G3 & Asia

Ma Tieying

Economist - Japan, South Korea, & Taiwan

The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or finan­cial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.

DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong.

PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No.