Malaysia Raised Interest Rates, BSP Next? As South Korean Stocks Stormed to Record Highs, 4Q GDP Shrunk!

Malaysia’s central bank, the Bank Negara Malaysia (BNM) raised policy rates for the first time since 2014. The reason provided (Bloomberg): “The government is forecasting growth of as much as 5.5 percent this year, buoyed by a global trade recovery and rising domestic spending. Inflation pressures are also building because of rising fuel and food costs.”

The BNM may have been pressured to hike rates intoned an international media outfit (Bloomberg): “Not since 2010 has Malaysia’s central bank faced as many calls from economists to raise interest rates as it does now.”

And Malaysia’s move has been perceived as the possible “breaking the ice” of an anticipated chain of interest rate increases for Southeast Asia region (Channel News Asia).  

“Malaysia is the first in Southeast Asia to raise its key rate in years, and the first Asian nation to hike them in 2018, during which many analysts expect the Federal Reserve is increase U.S. rates multiple times, as in 2017.

“South Korea raised its rates on Nov 30. The Philippines, which last hiked in September 2014, is expected by many economists to have at least one this year to cool its fast-growing economy.

Philippine 10-year bonds have risen far more than its Malaysian counterpart, even as inflation rates for both nations have almost been at the same level.

Though both countries have seen M2 climbing (as of October), the Philippines (+11.8%) has outpaced Malaysia (+5.25%). The bond markets have ostensibly been pricing higher long-term inflation for the Philippines than Malaysia.

Interestingly, Malaysia has a staggering household debt-to-GDP of 84.6% (3Q 2017) down from 88.4% in 2016.

Malaysia’s domestic credit-to-GDP was at a whopping 124% in 2016 as against the Philippines at 63.6% as of Q2 2017, according to BSP Governor Nestor Espenilla in a recent speech. Remember, only a few people have access to the formal banking system in the Philippines.

Moreover, at the end of 2012, Philippine credit-to-GDP was at 50.4%.  The current credit-to-GDP has now surpassed the 1997 high of 62.22% (See Phisix Breaks 6,900 as Inflation Risk Becomes a HOT Political Issue! July 6, 2014). Historically low interest rates have accommodated the current massive debt buildup.

As I previously pointed out*, the Malaysian government has imposed a targeted ban on property development in response to the prevailing glut.

*See Phisix 8,560: 7 Factors Behind 14th Record High That You Won’t Hear From the Mainstream January 2, 2018

That said, the property ban and the interest rate hike could be inferred as a combo of tightening measures, through administrative and monetary policies, intended to forestall a further buildup of excesses that may lead to financial crisis.

As one would probably observe, while the Malaysian government and the BNW have taken steps to contain their imbalances from spinning out of control, this has not been so with the BSP. Thus, Philippine treasury yields continue to stream higher (mostly the long-end). The BSP adamantly refuses to increase rates. The likely reason is that should a shortfall in RA 10963 occur, the BSP’s easy money regime should function as a contingency measure.

However, good fortune has endowed the BSP. The peso has firmed during the past two days because the US dollar index has crashed. The US dollar index plummeted to a 3-year low.

The USD meltdown temporarily conceals the emerging strains in Philippine treasuries and in the peso 

 

Finally, South Korea’s 4Q GDP surprisingly contracted in the 4Q

From FoxBusiness.com (bold mine)

South Korea's surprisingly weak economic performance in the last three months of 2017 isn't cause for concern but does support the case for a cautious stance on central bank policy, according to economists and bank officials.

The economy ended its streak of outperforming expectations in the last quarter by recording its first quarter-on-quarter contraction since the global financial crisis.

That resulted in growth for the year--at 3.1%--coming in just below the government's 3.2% target, but above 2016's expansion of 2.8%. Markets on Thursday brushed aside the result, with the Kospi jumping 1% to reach record highs.

South Korea’s KOSPI posted an astronomical 21.76% return in 2017! The KOSPI has been up a fantastic 3.84% year-to-date!

South Korea’s household debt has been growing at the fastest rate among OECD nations. Like Malaysia, it raised policy rates in November last year, and more recently, imposed “macroprudential” lending restraints.

So with inadequate economic growth, loose monetary policies continue to fuel a feeding frenzy of speculations, not only in the stock market but also in Bitcoin.

Much like everywhere else, stock prices have become detached with reality.

The three national benchmarks of South Korea’s KOSPI, Malaysia’s KLSE and the Philippine PSYEi 30 have also exhibited the same pathology.

 

P.S. The Philippine PhiSYx hit another 8,999 today by force.

The biggest contributors to the huge end-session pumping were SM +.92%, JG Summit +.65% and Aboitiz Equity +2.9%

Yesterday’s -.88% loss was mitigated by colossal mark the close pumps by SMPH +.77% and by SM +1.1%

Tuesday’s .54% gain by the PSYEi 30 had been mainly through a stunning +2.34% pump on SM.

The Sy Companies have been the mainstays of the orchestrated pumps.

The Flailing US Dollar Index Fueled a Significant Rally of the Philippine Peso

The Philippine peso staged a powerful .59% rally against the USD, which forced a breakdown of 51 level last week. The peso has rebounded in two out of the past three weeks to accrue a substantial gain of 1.21%.

The conditions of the peso should be examined in the context of the broader picture.

The recovery of the peso emerged in the backdrop of a remarkable plunge in the USD dollar index (Bloomberg Dollar BBDXY -1.46%; Dollar Index spot DXY -1.6%)

Since the start of the year, the US dollar index (USD) had been plagued by depreciation. Such weakness has even accelerated over the past few weeks.

Falling 10-year US Treasury notes (or rising US bond prices) have accompanied the infirmities of the USD. Even more, US yield curve has been flattening too (see 10-year minus 2-year and 10-year minus 3-months).

And the weak US dollar has fired up its nemesis gold (+1.56% week on week)

It is possible the US President Trump’s fading approval ratings may have partially influenced the US dollar as alleged by some.

However, in the framework of US conditions, rising bond prices presage economic vulnerability which seems to have been reinforced by the flattening yield curve. Perhaps the markets could be anticipating the FED’s prospective easing.

Fascinatingly, US bonds and stocks have been emitting contradictory signals.

Additionally, contrasting policies by the US Fed and global central banks may likewise have contributed to the feeble US dollar.

As I earlier wrote*,

Moreover, the tsunami of liquidity thrown into the financial system by global central banks has limned a scenario of significant improvements in the global economy. This impression of growth has reduced perceived strains in the system, thus, has partly fed into the dumping of the USD dollar!

*More on Drowning in Debt: BDO, Ayala Corp, San Miguel and Subprime Emerging Markets September 10, 2017

The surge in US dollar borrowings here and in emerging markets and the synchronous race for yields manifested in the milestone or near record highs of many stock market benchmarks in the Asian Pacific region and the world has mainly been a consequence of a perceived easing of global financial conditions.

US stocks have ingested this position.

This perceived easing of global financial conditions has only intensified this week as manifested by strengthening of Asian currencies.

With the exception of the South Korean won, the entire spectrum of the Asian currencies quoted on Bloomberg registered gains.

The US dollar fell most against the Malaysian ringgit (-1.77%), Singapore dollar (-1.22%), Chinese renminbi (-.98%) and the Indonesian rupiah (-1%). The Bloomberg-JP Morgan Asian Dollar (ADXY) index surged by .47%. (lower window)

On a year to date basis, with the exception of the peso (+2.31%), the US dollar has fallen against ALL Asian currencies. The ADXY has been up by 6% which reflects the degree of gains enjoyed by most of the currencies in the region.

And no, this has not been about the August Gross International Reserves.

The increase in August’s $448 million GIR has mainly emanated from “revaluation” or increases in gold prices (+$427.8 million). The irony of the reserve data stems from the fact that the increase in gold prices came with the fall of the USD index!

Yet, the USD rose against the peso over the said period.

The other contributor to the increase in GIR has been in Foreign Currency assets (+$310 million), which may be about derivatives that offset the decline in Foreign Investments (-$286.3 million). The once little-used forex segment of the reserves has spiked anew to record highs as the peso plunged.

On a year on year basis, the August GIR registered a hefty 4.99% fall.

The broad based weakness of the US dollar has provided a fleeting camouflage to the BSP’s debasement of the peso through record debt monetization.