US

Higher consumer spending at the expense of savings

Consumer spending rose solidly in December at a healthy pace by 0.4% m/m while personal income gained 0.4% and wages improved 0.5%. Meanwhile, the core PCE, which is the Fed’s preferred gauge, climbed 1.7% y/y in December, bringing the full-year average to 1.5%, missing the Fed’s 2.0% target since mid-2012. However, the savings rate dropped to a 10-year low of 2.4%.

Despite the core PCE having undershot the Fed’s 2% target for nearly 5½ years, we expect the Fed to raise rates three times in 2018. The first rate hike is likely to be executed in March by 25bps. In the coming FOMC meeting, we expect the Fed, with its new Chair Jerome Powell taking over from Janet Yellen in February, to paint a slightly hawkish tone to prepare for March rate hike.

• Consumer spending rose solidly in December as demand for goods and services increased. It rose by 0.4% m/m in December from 0.8% m/m in November. Personal income gained 0.4% in December from 0.3% in November. Wages increased 0.5% in December versus 0.4% in November.

• Strong consumer spending helped to offset the drag from trade and inventories, thus allowing the economy to grow 2.6% in 4Q2017 from 3.2% in 3Q2017.

• Inflation in December rose. The Fed’s preferred inflation gauge i.e. personal consumption expenditures (PCE) price index excluding food and energy edged up 0.2% m/m in December from 0.1% m/m in November. On an annual basis, the PCE climbed modestly by 1.7% y/y from 1.8% y/y in November. For the full year of 2017, the core PCE gained 1.5%, missing the Fed's 2% target again since mid-2012.

• Meanwhile, the increase in consumer spending came at the expense of savings, which dropped to a 10-year low of 2.4%, the lowest level since September 2005 from 2.5% in November. The low savings can act as a red flag for both consumer spending and economic growth.

• Despite the core PCE having undershot the Fed’s 2% target for nearly 5½ years, we expect the Fed to raise rates three times in 2018. The first rate hike is likely to be executed in March by 25bps. In the coming FOMC meeting, we expect the Fed, with its new Chair Jerome Powell taking over from Janet Yellen in February, to paint a slightly hawkish tone to prepare for March rate hike.

Malaysia

Manufacturing PMI back in contraction

Headline manufacturing PMI, a composite indicator of manufacturing performance, drifted into the contraction region in February to 49.9 in February due to weaker new orders while export orders declined for the third month due to poor demand from the US and Europe, and firms experiencing margin squeeze.

Nonetheless, manufactures are still optimistic on the 12-month output supported by our forward-looking indicators. Besides, we expect the USD/MYR to be around 3.88–3.90 (end-period) and 3.90–3.92 (full-year average), crude oil prices to average around US$57 and US$61 per barrel for WTI and Brent respectively, contained inflation, positive wealth effect and low risk aversion to support the overall sentiments.

• The headline manufacturing PMI, a composite indicator of manufacturing performance, drifted into the contraction region in February. The index dropped slightly below the 50 threshold, which demarcates between expansion and contraction, to 49.9 in February from 50.5 in January.

• The drag came from weaker new orders but only at a marginal rate. Besides, export orders continued to decline for the third month in a row due to weak demand from the US and Europe. Also, firms were unable to fully pass on the high cost to pricesensitive customers, suggesting the issue of profit margin squeeze remains.

• Nonetheless, manufactures are still optimistic on the 12-month output. Our forward-looking indicators suggest the potential overall investment mood remains positive. Besides, we expect the USD/MYR to be around 3.88–3.90 (end-period) and 3.90– 3.92 (full-year average), crude oil prices to average around US$57 and US$61 per barrel for WTI and Brent respectively, contained inflation, positive wealth effect and low risk aversion to support the overall sentiments.

Indonesia

Moderate CPI ahead

February CPI grew at 3.2% y/y, slightly lower than in the first month of 2018. Core CPI also moved in line with the CPI, slowing down to the lowest rate in three years of 2.6% y/y, from 2.7% y/y previously. Core CPI has been on a declining trend since September 2015 when it peaked at 5.1% y/y.

Growth in food prices, which dipped below zero in November 2017, has risen to 3.4% y/y last month. Meanwhile, administered prices (government-announced prices) have moderated to 5.3% y/y in February. Thus, with stable commodity prices, we expect inflation to grow moderately. We also expect the central bank of Indonesia to keep its 7-day reverse repo rate at 4.25% throughout 2018 to ensure the economy grows at a sustainable pace.

• February CPI grew at 3.2% y/y, slightly lower than in the first month of 2018. Core CPI also moved in line with the CPI, slowing down to the lowest rate in three years of 2.6% y/y, from 2.7% y/y previously. Core CPI has been on a declining trend since September 2015 when it peaked at 5.1% y/y.

• This means that real returns has recovered from 0.53% in September 2017 (when Bank Indonesia first lowered the policy rate to 4.25%), to 1.01% in February. A breakdown of the CPI Index shows that prices of clothing gained at the fastest pace of 3.9% y/y while transportation had actually decelerated to 1.4% y/y, slowing down further from June 2017’s high of 5.8% y/y.

• Growth in food prices, which dipped below zero in November 2017, has risen to 3.4% y/y last month. Meanwhile, administered prices (government-announced prices) have moderated to 5.3% y/y in February. Energy prices have also moderated to 7.4% y/y.

• Thus, with stable commodity prices, we expect inflation to grow moderately. We also expect the central bank of Indonesia to keep its 7-day reverse repo rate at 4.25% throughout 2018 to ensure the economy to grow at a sustainable pace.

Source: AmInvest Research - 2 Mar 2018