Industrial production continued to grow at a fast pace by 6.1% y/y in July supported by sharp manufacturing and electricity. Both rose 8.0% and 7.9% y/y respectively with mining improving marginally by 0.2% y/y. We believe the strong manufacturing output was largely supported by export-led activities reflected by the 30.9% y/y growth in exports in July.

However, we would like to remain fairly cautious on the August manufacturing PMI data. Growth is largely coming from an improvement in new export orders. Domestic demand still remains lukewarm. With domestic activities still staying lukewarm, the current overnight policy rate (OPR) of 3.00% is likely to stay which is our base case scenario. We still maintain our 45% chance for a 25bps rate hike in 4Q2017. This can happen only if domestic activities pick up strongly thus accelerating the demand pull pressure.

• Industrial production (IP) continued to grow at a fast pace. In July, IP rose 6.1% y/y from 4.0% y/y in June, bringing the average first 7 months of IP to 4.5% y/y. The strong IP was supported by sharp manufacturing and electricity, both climbing 8.0% y/y and 7.9% y/y respectively. Meanwhile, mining grew marginally by 0.2% y/y for the second consecutive month.

• We found the manufacturing output in July to be the strongest in three years. This does not come as a surprise given such strong export numbers reported in July, up 30.9% y/y. It appears to us that the export-led activities are providing the key impetus to manufacturing growth. This is reflected by the Purchasing Managers Index (PMI) reading which passed the 50- mark threshold to 50.4 in August after being in the contraction region for three consecutive months.

• However, we would like to remain fairly cautious on the August manufacturing PMI data. Growth is largely coming from an improvement in new export orders. Domestic demand still remains lukewarm.

• With domestic activities still staying lukewarm, the current overnight policy rate (OPR) of 3.00% is likely to stay which is our base case scenario. We still maintain our 45% chance for a 25bps rate hike in 4Q2017. This can happen only if domestic activities pick up strongly thus accelerating the demand pull pressure.

Source: AmInvest Research - 12 Sept 2017