Growth is surely soggier, but here’s a silver lining – A dovish Fed gives Asian central banks more wiggle room to help

The newsflow is decidedly negative on the external front. In Asia, every exporter, with the exception of Australia, had declining earnings in December 2018. The latest PMIs and trade data for January suggest that external demand is not better in Q1 2019. Even if China exports bounced in January, which tends to be volatile due to the Lunar New Year seasonality effect, the three-month moving average trend shows a sharp slowdown. And here is the bad news, weak merchandise shipment is spilling over to the domestic sectors with retail sales decelerating across the region except for Indonesia, Vietnam and Thailand ( Chart 7 ). In other words, the Asia Pacific region growth engine is sputtering. In 2018, despite slowing GDP, many Asian central banks’ hands were tied, and worse still, some even had to tighten aggressively even as domestic demand falters, as higher USD rates forced policymakers to prioritize macroeconomic stability over growth. Our Natixis Monetary Condition Indices ( NXMCI ) show tightening monetary condition across the board in Asia despite worse growth conditions. Notably, monetary condition is tightest in India and Malaysia. With a more dovish Fed, markets have priced out expectations of rate hike (Natixis has zero hike in 2019). And this is good news for the region because it gives central bankers renewed policy space to support domestic conditions. India took the opportunity for example to slashed rates by 25bps, a move it will continue with another 25bps cut as CPI remains tame. Malaysia, too, will likely cut rates soon as real rates remain tight and CPI is below 1%. Our forecast shows that inflation won’t pick up until H2 2019 and even so it remains very manageable. In other words, the RBI likely commenced an easing cycle in Asia, which is good news because at the least, tighter monetary conditions is not one of the challenges facing the region. We expect India, Indonesia, Korea, and Malaysia to cut rates in Asia. China, too, will not only continue its RRR rate cut but also use administrative measures to ease liquidity conditions for the private sector.