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Christopher Wood christopher.wood@clsa.com +852 2600 8516<br />
Figure 11<br />
Indonesia 10-year government bond yield and rupiah/US$<br />
10.0<br />
9.5<br />
9.0<br />
8.5<br />
8.0<br />
7.5<br />
7.0<br />
6.5<br />
(%) Indonesia 10Y rupiah government bond yield<br />
Rupiah/US$ (RHS)<br />
15,500<br />
15,000<br />
14,500<br />
14,000<br />
13,500<br />
13,000<br />
12,500<br />
6.0<br />
12,000<br />
Jan 15<br />
Mar 15<br />
May 15<br />
Jul 15<br />
Sep 15<br />
Nov 15<br />
Jan 16<br />
Mar 16<br />
May 16<br />
Jul 16<br />
Sep 16<br />
Nov 16<br />
Jan 17<br />
Mar 17<br />
May 17<br />
Jul 17<br />
Sep 17<br />
Nov 17<br />
Jan 18<br />
Mar 18<br />
May 18<br />
Jul 18<br />
Sep 18<br />
Nov 18<br />
Source: CLSA, Bloomberg<br />
Figure 12<br />
Indonesia real GDP growth<br />
6.5<br />
(%YoY)<br />
Indonesia real GDP growth<br />
6.0<br />
5.5<br />
5.0<br />
4.5<br />
4.0<br />
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 9M18<br />
Source: CLSA, CEIC Data<br />
In both countries the risk is a renewed spike in oil but that, in GREED & fear’s view, is more a threat<br />
to the currencies than bond yields. Indeed the 4.2% and 4.5% appreciation of the rupee and rupiah<br />
in recent weeks has coincided with the correction in oil.<br />
Meanwhile the more stock markets fall and government bonds rally, the more likely the Fed signals<br />
that it is stepping back and, clearly, a sustainable rally in Asia requires an end to Fed tightening and,<br />
with it, the likely end of US dollar strength. But the best way to get the Fed’s attention quickly is not<br />
declining share prices but surging credit spreads. Weaker data, such as this week’s US housing data,<br />
will also help. The NAHB US Housing Market Index declined by 8 points to 60 in November, the<br />
lowest level since August 2016 and the biggest monthly decline since February 2014 (see Figure 13).<br />
While US building permits declined by 0.6% MoM and 6% YoY in October, the biggest YoY decline<br />
since June 2016 (see Figure 14). It is also increasing likely that core inflation has peaked, or is at<br />
least close to peaking. Core CPI inflation slowed to 2.1%YoY in October, down from 2.2% YoY in<br />
September and 2.4% YoY in July (see Figure 15). It is also worth noting that Federal Reserve vice<br />
chairman Richard Clarida said in a TV interview last Friday that interest rate policy is getting closer<br />
to neutral while there is some evidence of global slowing.<br />
Thursday, 22 November 2018 Page 6
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