Rising odds of Singapore easing may see yields go up, not down

An aerial view shows commercial and residential buildings in central Singapore, June 22, 2019. (PHOTO: REUTERS/Loriene Perera)

By Masaki Kondo

(Bloomberg) -- A rapid deterioration in Singapore’s economic data has fueled speculation the central bank will ease monetary policy. The result may be higher interest rates and bond yields.

Bets the Monetary Authority of Singapore will adjust policy have intensified after government reports over the past month showed the economy unexpectedly shrank 3.4% in the second quarter and exports slumped 17.3% in June. The trade-reliant economy has suffered amid escalating tensions between the U.S. and China.

The data caused a jump in the three-month swap-offer rate, one of the nation’s benchmark interest rates that reflects the cost of borrowing in Singapore dollars. The gauge rose for four days after the GDP data even as borrowing costs in the rest of the world fell. The rate had previously surged in January 2015 when the MAS eased policy, and again in April 2016 when it stopped seeking currency appreciation.

The counter-intuitive relationship between monetary policy and borrowing costs is due to how Singapore’s central bank seeks to guide the economy. Instead of using interest rates to adjust liquidity, MAS does so through adjusting the currency against an undisclosed basket.

In the absence of central bank control, interest rates are typically dependent on those overseas, particularly in the U.S. They also move based on expectations for whether the local currency is expected to strengthen or weaken.

“We are now looking for the MAS to ease policy in October” due to deteriorating growth and slowing inflation, said Irene Cheung, a senior Asia strategist at Australia & New Zealand Banking Group Ltd. in Singapore. “Given easing in currency policy, Singapore rates will likely be supported even though lower U.S. rates will exert downward pressure.”

Any weakness in inflation numbers due this week may add to easing bets. Core inflation probably slowed to 1.2% last month, which would be least since March 2017, according to a Bloomberg survey before the data is released Tuesday. The gauge has dropped from as high as 1.9% in December amid stuttering local growth and the U.S.-China trade war.

Whereas most central banks review policy eight to 12 times a year, MAS only does so twice: in April and October. Given the rapidly worsening economic environment, ING Groep NV says local policy makers may feel compelled to make an unscheduled adjustment.

“Talk of an off-cycle policy adjustment, before the next scheduled semi-annual review in October, has gained traction,” Prakash Sakpal, an economist at ING, wrote last week in a research note. “We continue to expect easing either this month or next.”

Below are key Asian economic data and events due this week:

DATE

COUNTRY

DATA/EVENT

July 22

Singapore

Announcement of 5-year bond sale


Japan

JSDA bond transaction data


Thailand

June customs trade balance


Philippines

June budget balance


Hong Kong

June inflation


Taiwan

June export orders



June unemployment

July 23

Japan

40-year bond auction


Australia

RBA’s Kent gives speech


Singapore

June inflation


Taiwan

June industrial production

July 24

Japan

July PMI



May leading index


Australia

July PMI


New Zealand

June trade balance


Malaysia

June inflation


Thailand

Auction of 2038 bonds

July 25

Japan

Weekly portfolio flow data



2-year bond auction


Australia

RBA Governor Lowe speech


New Zealand

Auction of 2025 bonds


South Korea

2Q GDP


Hong Kong

June trade balance

July 26

Japan

July Tokyo CPI


Singapore

2Q unemployment



June industrial production



2Q home prices


South Korea

July consumer confidence

© 2019 Bloomberg L.P.