sluggish times ahead?

The US Fed had its first rate hike in almost a decade in Dec 2015, which appears to be tightening very late into the economic cycle and amidst declining corporate earnings in the US. With strong Dollar and subdued inflation currently permeating the economy, it seems that now is the year of policy divergence, i.e the US is tightening while the rest of the world easing.

In contrast, ECB continues to enhance its QE program and Japan struggles to grow out of deflation. The regions currently are operating in a negative interest rate environment.

Commodity slump affecting emerging market economies, along with capital outflow, tightening liquidity and weak currencies. These factors ascertaining a challenging 2016 for Asian emerging market economies, particularly the countries that have built the economies to serve China commodities demand.

Asia GDP growth will continue to decelerate in 2016 as a result of high debt, excess industrial capacity and poor external demand. In some Asian countries, the debt levels have reached more than 150% of GDP. Japan for instance, its debt level has now reached near 400% of its GDP. Malaysia’s debt is now over 200% of GDP and surprisingly Indonesia is below 100% level.

Interesting updates have emerged beginning of 2016, where Malaysia’s central bank has cut the statutory reserve requirements (SRR) from 4% to 3.50%, as an effort to increase liquidity in the market and also serves as a credit creation measure. The market now anticipates further cuts throughout 2016, with a probable OPR cut towards the end of 2016. As of December 2015 the foreign holdings of the govt bonds including the t-bills was around 46%..

In an effort to pump money into the market, Japan BoJ has also cut its interest rate. In which it turns out to be a good news for emerging market economies, whereby investors could be seen shifting to EM in searching for higher yields. EM countries, particularly Indonesia, India and Mexico are leading in terms of foreign inflows in their government bonds so far in 2016. In Indonesia, the majority of foreign inflows occurred after Bank Indonesia reduced policy rates by 25bp in January 2016.

2016, as everyone predicts, will be another year of sluggish growth for the global economy as well as volatility in the bond market.

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Stronger dollar and higher rates

Fed rate normalisation

Most analysts are forecasting an increase in fed fund rate and tightening of US monetary conditions, perhaps by second half of 2015. This move will impact  Asian countries, being the large recipients of QE flows and thus vulnerable to sudden stops in the flow.

Further to this, China slower growth and weak imports, as opposed to US’ stronger import would dampen Asia’s export recovery.

Data from Bank of America Merrill Lynch

 Look where Malaysia is?

On the eastern side, Abenomics have failed to achieve the objectives (the three arrows) and Japan is thus likely to be in deflationary state. With the current state of low oil price, Japan as net energy importer would benefit from it, and BOJ has thus lowered its CPI forecast to 1% which has suggested that further monetary easing would be necessary. Subsequent to this yen is expected to go lower to 130 by year end (source: ABN Amro) and putting downward pressure on prices which in turns may delay their inflation target this year.

US is certainly benefiting from potential rate hike and stronger dollar. As we can see in the recent years there is a continuous upbeat in the US economy.

Certainly there are many more areas to look at, Malaysia for example as the exporter of oil impacted by the fell in oil price which has prompted the government to revise its 2015 budget. Greece crisis and Eurozone issues at large are another angle to look at which certainly have impacts on the global growth this year. On the other hand, Indonesia, India and Philippines are enjoying growth and positive outlook, stemming particularly from the policy revision, rebound in government spending and fiscal reduction pledge by their respective governments.