FOMC Recap
Feb 01, 2006
David Greenlaw (New York)
The Greenspan legacy came to an end on Tuesday afternoon with a resounding yawn. As anticipated, the FOMC hiked the funds rate target by 25 bp to 4.50% and issued a statement that provided somewhat greater policy flexibility going forward.
Specifically, the portion of the statement issued in December that indicated “some further measured policy firming is likely to be needed” was altered to read “some further policy firming may be needed.” Such a rewording was widely anticipated. The wording change reflects the fact that the stance of monetary policy is now near neutral and the path of the federal funds rate will become much more data dependent going forward. We do not believe the omission of the “measured” reference is significant. The minutes from the December meeting revealed that there was considerable discussion regarding this phrase and it was retained at that time simply in order to avoid any confusion regarding the magnitude of future rate hikes. Since rate hikes are no longer guaranteed, there was no need to describe the size. The section of the statement dealing with the current state of the economy did not contain an explicit reference to the disappointing GDP data released on Friday, but did note that recent data have been “uneven.” Still, the expansion was described as “solid.” Moreover, the description of the inflation environment — low core inflation and contained inflation expectations at present but some possible pick-up ahead — was identical to the December version. We continue to believe that the Fed will have sufficient ammunition to hike the funds rate to 4.75% at the March 28 meeting. While this is hardly a done deal at this point, pricing in the fed funds futures market now implies a slightly greater than 80% chance of such a move. Incoming Fed Chairman Bernanke, who was confirmed by the Senate on Tuesday afternoon, will deliver the semi-annual Monetary Policy Report to Congress on February 15 and 16. We expect a balanced assessment of the economic landscape and an emphasis on the shift to a more data dependent policy environment. A new era may have arrived but we doubt that the near-term course of policy will be noticeably influenced by Greenspan-Bernanke transition.
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Strong 4Q Lifts 2005 Growth to 5.1% YoY
Feb 01, 2006
Deyi Tan (Singapore) and Denise Yam CFA (Hong Kong)
4Q GDP grew by a strong 6.1% YoY (versus a revised 4.5% in 3Q), exceeding the market consensus of 4.7%. This brings the full-year growth to 5.1%, which is below the 6% in 2004. Private consumption, the key demand-side driver: The growth dynamics remained the same. Private consumption spending accelerated to 5.2% YoY, contributing 4.1%-pts (vs 3.8%-pts in 3Q) to headline growth amid strong remittance receipts (+23% YoY). However, momentum on the government spending front faltered (-4.2% YoY) due to ongoing fiscal discipline. Capital formation and trade still lagging: Investment contributed negatively to growth, with fixed capital formation and addition to stocks reducing headline growth by 0.2%-pts and 0.3%-pts, respectively. Businesses appear to be putting off outlays in durable equipments (-7.8% YoY) until the political climate improves. Meanwhile, net external trade shaved 0.4%-pts from GDP growth. Exports expanded by only 0.4% YoY despite the recovery in other ASEAN countries. We believe this is because the Philippines is stuck in an export space that is neither low enough in terms of costs or high enough in terms of the value-chain. Sector performance improved across the board: All three sectors registered a robust comeback in the final quarter of 2005. The services sector, comprising nearly 50% of GDP, contributed a hefty 3.1%-pts to headline growth and grew at a faster 6.7% YoY (vs 5.4% in 3Q). Industry and agriculture also revived their pace in 4Q and contributed an improved 2.1%-pts and 0.8%-pts, respectively, to growth. 2006 to grow by 4.5%: The government forecasts 2006 growth at 5.7-6.3%. In the absence of solid structural plans or a strong political climate, this could be too optimistic, in our view. We believe the economy will likely grow closer to 4.5% in 2006. Specifically, remittances inflow will continue to help the economy maintain a decent pace, though the increased VAT burden could bear down slightly on consumer spending. We acknowledge the contribution of Malika Pant to this Report
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2005 CA Deficit at US$3.7bn
Feb 01, 2006
Deyi Tan (Singapore) and Denise Yam CFA (Hong Kong)
Current account surplus for the sixth straight month: The current account registered a surplus (US$401 mn vs US$441 mn in Nov) for the sixth straight month in December, after dipping into a temporary deficit in 1H05 due to massive oil imports. For the full year, the current account deficit was US$3.7 bn, slightly less than our estimate of US$4.1 bn. Imports surged due to low base effects: On a BoP basis, imports (+26% YoY) outpaced exports (+11.7% YoY) in December due to a low base effect. On a MoM basis, however, both contracted by 3.6% and 3.3%, respectively. For the full year, sporadic softness in global demand meant that export momentum eased from 2004. However, a relatively early and all-round recovery in key export markets kept growth at a respectable 15% YoY (vs +21.6% YoY in 2004). Meanwhile, imports held up (+26% YoY vs +25.7% YoY in 2004) amid strong inventory accumulation, high oil prices and preparation for infrastructure projects. Tsunami-affected tourism did not contribute significantly to the CA deficit; the trade balance was the key culprit: Actual numbers are not yet out but based on other tourism indicators, tourist arrivals likely remained at 2004 levels (11.7 mn). This would be a respectable result when compared to our original estimate (right after the tsunami) that only 75-80% of the targeted 13.4 mn tourist arrivals would be achieved. Travel receipts for 1Q05-3Q05 (for which data is available) was only US$0.1 bn lower than the year-ago period. This is small compared to the US$3.7 bn current account deficit that we are seeing for 2005. Current account to remain in deficit in 2006: We expect the current account to remain in deficit for the next few years, coming up to -3.8% of GDP in 2006 on the back of continued strong imports as infrastructure projects commence officially. Meanwhile, the government expects the current account deficit to average 3.5% of GDP for the next five years.
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On Top of the World
Feb 01, 2006
Takehiro Sato (Tokyo)
We forecast real GDP for Oct-Dec (preliminary data, to be announced on Feb. 17) at +1.8% QoQ (+7.6% SAAR), in which all demand components are likely to contribute positively, with personal consumption and net exports especially prominent. This would put Japan first among the industrialized nations in a dramatic momentum shift. As a result, we also see a strong possibility that real growth for F2005 will top +3%. Also, if we extend our forecast based on our current economic outlook, we can look for more 3%+ growth, with 3.3% for F2006 (3.7% for C2006), thanks to the higher base effect. The drivers for this high growth in Oct-Dec have been personal consumption (+1.3% QoQ) and net exports (contribution +0.5% QoQ). With nominal incomes turning up, and consumer sentiment getting better, personal consumption appears to have been strong, particularly for the high-ticket discretionary items. Strong sales of winter goods thanks to the cold snap from December have also helped. Also, net exports have turned up on the whole, spurred on by firm demand from the US and China (especially, exports to China have hit a new high), while imports have shown a retracement from Jul-Sept when imports picked up sharply. Likewise, capex appears to have shown a strong bounce back from Jul-Sept. It might appear that the growth driver has shifted to overseas demand, given the prospect of a stronger contribution from this item in the quarter. However, the current reality is an autonomous, sustainable recovery led by domestic demand from rising personal consumption and capex. We expect steady momentum for personal consumption in Jan-Mar as well, judging from mid-period data on department-store sales and other trends, and capex is likely to expand from pent-up demand for facility replacement mainly in the non-manufacturing sector. We forecast price stability (core of core CPI) near 0% even with upbeat economic growth, primarily aided by a quiet upward shift in productivity for the quasi-public sector. We envision continued support for Japan’s asset markets from an ideal combination of healthy economic performance and stable prices. Upcoming data releases that could affect Oct-Dec GDP numbers are the household survey for all households and the Survey of Household Economy for December (due out on February 10). We might slightly revise our forecast depending on these results. But we do not anticipate changes in our overall outlook for strong economic growth at an annualized rate of roughly 7-8%.
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