Sat, Nov 27, 2021 @ 21:26 GMT
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Singapore Springs Surprise Monetary Tightening

MAS tightens policy

The transitory inflation argument was given another jab to the kidneys today as the Monetary Authority of Singapore delivered a modest, but very surprising, tightening of monetary policy. The MAS will allow a slight appreciation of the Singapore Dollar Nominal Effective Exchange Rate or S$NEER (for overseas readers, Singapore does not use interest rates for monetary policy, it uses the S$NEER mechanism.) That represents a slight tightening of monetary policy.

The MAS growth forecasts remained on track with the only cautionary note being Covid-19 tail risks. It noted that imported cost pressures would drive inflation in the quarters ahead, hence allowing the S$NEER to appreciate. What is notable is that Singapore’s MAS only adjusts monetary policy twice a year. Given that six-monthly cycle, if the MAS is tightening slightly now, it is clear they believe inflation is going to be here for longer. They likely also have one eye on the impending Fed taper. Thus, the transitory inflation “how long is a piece of string before it’s not transitory” becomes harder to justify.

The FOMC minutes overnight also telegraphed a November/December start to the Fed taper although the stress appears to be being expressed a flattening of the US yield curve, with short end rates rising while longer-dated rates fall. That might be because long-term inflation break evens remain anchored around 2.50%. US Inflation and Core Inflation MoM rose by 0.40% and 0.20% respectively. That left the YoY headline inflation slightly above forecast at 5.40% while core remained at 4.0%. Although inflation remains “sticky” at these levels, it was not enough to lead to an inflation shock for US markets and equities duly rallied while a bout of long covering pummelled the US dollar. It is likely to be only a temporary aberration for both.

On the inflationary front, markets have breathed a sigh of relief after China bucked the trend and posted slightly lower inflation data today. September MoM Inflation fell to 0.0%, below forecast of 0.30%, while the YoY fell to 0.70% from 0.80%. There is a sting in the tail though as September PPI YoY rose to 10.70%, the highest since records began. That suggests that inflationary pressures will persist in the China value chain.

Japan’s Industrial Production data is unlikely to move the needle today, with local markets focused entirely on the extent of the upcoming fiscal goodie bag after the end-of-month elections. The BOJ’s Noguchi said this morning that a reduction in monetary stimulus from the BOJ was not an option at the moment. That makes selling USD/JPY a dangerous trade going forward but is music to the ears of local equity markets.

India’s WPI Inflation for September this afternoon is likely to make ugly reading, however. WPI Inflation YoY is expected to remain above 11.0% and while the food price pressures have ebbed, the fuel and manufacturing sub-indexes could make even more ugly reading given the moves in energy prices and the depreciation of the currency. A print well north of 11.0% for inflation could see the modest recovery of the INR hit a brick wall, with USD/INR resuming its rally towards 76.000. The RBI has stopped its QE don’t call it QE programme but is still holding off on signalling more strongly that rate hikes are coming. Today’s WPI is likely to heap further pressure on the central bank.

The Turkish lira is once again in the spotlight after President Erdogan fired three central bank officials. The USD/TRY, or as I call it, the USD/Try-my-patience, resumed its rally overnight, rising 0.50%, climbing another 0.70% to 9.1480 in Asia today. For context, President Erdogan believes that cutting interest rates causes inflation to fall, and he tends to fire central bank employees, including governors, who disagree with him in this respect. Readers should be pencilling in USD/TRY trading on a 10.0000 handle sooner rather than later.

Europe’s calendar is second-tier today while US markets will be focusing on Initial Jobless Claims, PPI, and Core PPI. A sharp drop in Initial Claims, and/or an MoM rise above 0.70% for PPI should be enough to have the Fed taper trade back on track after a short overnight staycation. Watch also for official US Crude Inventories data after a surprise jump in US API Inventories above 5 million barrels overnight. Forecasts are for a 700k barrel gain, a blockbuster climb could be enough to finally trigger an aggressively short-term correction lower I have been waiting for, to thin the herd of speculative long positions out there. Finally, by my count, we have at least six Federal Reserve regional presidents speaking today, good for intra-day volatility and likely to push US earnings releases into the background.

 

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