Asia Sentry Dispatch

August 21, 2012

No Asia inflection over August

The partial indicators are already starting to add some color to August and that color is red. There is no evidence of any moderation in the downward trend in Asian economic output and we retain our view that Q3 will be weaker than Q2. If anything, the downward pressure on output appears to be strengthening. Today, the inversion of the CNY swap curve once again points to a renewed weakening in Chinese output in the second half of the year. The prudence of the PBoC in refraining from an additional RRR cut coupled with growing capital outflows has resulted in a considerable tightening of liquidity in China. The 12.4%YoY decline in South Korean exports in the August 1-20 period compared to last year speaks of frail regional trade.
The inverted swap curve in China points to renewed weakness in H2, not a recovery.

Source: Asia Sentry Advisory Pty Ltd and Bloomberg

Tuesday August 21, 2012.

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Sentry Dispatch: The High Frequency Letter of Asia Sentry Advisory.

South Korea is the canary in the global trade coal-mine.

The quality and timeliness of the South Korean customs data makes it one of the best leading indicators of the Asia region. That data is not looking good! Korean Customs advised this morning that the South Korea economy posted a trade deficit of $4.48bn in the first 20 days of August. Exports were 12.4% lower than the same period a year earlier whilst imports were 11.4% lower. We have noted previously that the coincident weakening of both exports and imports for a processing economy (one that imports to export) is an important signal of falling external demand in an inventory lean environment leading to an immediate decline in imports. Hence, there is no buffering of overall global trade, which is retrenching quite sharply. If sustained through the final 11 days of the month, the weakening in South Koreas exports would have become much more pronounced in August. Over the year to July, South Koreas exports were down by 8.8% following an increase of 1.0%YoY in June. Again, the timeliness of South Koreas trade figures are what makes them so valuable. The final trade figures are released on the 1st of September. At that time, we will have 2/3rd of the quarters trade data and it certainly looks as if Q3 will be much weaker than Q2.

The slope of the IRS curve in China is a valid leading indicator.

There are some who consider Chinas financial markets too immature or underdeveloped for the financial side of the economy to contain any signaling information on the real side of the economy. Not so. The slope of the swaps curve in China has been an excellent leading indicator of economic activity. Intuitively, China is a liquidity driven economy where authorities have typically used the volume of liquidity, not the price of money, to manage the cycle. Hence, we would advise that discounting the signal an inverted swaps curve is giving is one you make at your own peril. The shape of the swaps curve has typically led economic activity by 1-3 quarters. We use industrial production to proxy economic activity. Hence, the inversion of the swaps curve, and the fact that it has generally been flatter over the past 6 months than it was in the second half of 2008 speaks amply of the risks to the Chinese economy in H2-2012.

PBoC hits the OMO Panic Button this morning.

The PBoC is certainly trying to pump liquidity into the financial markets at an increasingly frantic pace. This morning the PBoC rammed CNY220bn of liquidity into markets via reverse repos. This was the largest amount of single day repos ever undertaken by the Bank. The background chatter in Beijing continues to be of policy makers highly reluctant to cut the RRR in fear of reflating the property market. As we have noted before, the cost of greater policy prudence in China will be a tolerated hard landing. Todays conclusion. The real sectors of Asias major economies continue to weaken in August with the financial tightening in China suggesting renewed weakness in that principal economy in Q3-4. Abandon all hope ye who thought Asia was stabilising.

Tuesday August 21, 2012.

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Sentry Dispatch: The High Frequency Letter of Asia Sentry Advisory.

Asia Sentry Advisory Pty Ltd Suite 9, Level 40, Northpoint Tower 100 Miller Street, North Sydney, NSW, 2060, Australia. Ph: +61 2 9931 7820 Fx: +61 2 9931 6888 M: +61 401 548 820 www.asiasentry.com gbmaguire@bloomberg.net glenn@asiasentry.com

Asia Sentry Advisory Pty Ltd is a boutique economic consultancy established to meet the growing demands of clients seeking greater exposure to the most dynamic economic region in the post-crisis global economy, Asia. Asia Sentry Advisory marries keen judgment with a rigorous model-based approach and a deeply intuitive understanding of Asia that can only come from on-the-ground experience to deliver market out-performing analysis and forecasts.
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