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Market Analysis and Insights by Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,
Challenging Limits?
Your scribe fondly recalls a Tasmanian speed warning that read “It is a limit, not a challenge”. The cheeky comeback being, all limits tempt, if not exist for, a challenge. Bond markets and reflation appear to be challenging limits, as 10Y UST yields burst past 1.3% handle. (although not a limit). That this far outpaced the pick-up in inflation expectations (10Y break-even) means that implied real UST yields have risen past -1% (limit?) for the first time since early-/mid- Jan.
Higher real yields, if sustained, may challenge the limits of equity market buoyancy. For now though, Wall St has merely slipped back from fresh records in late trades. But USD has been aroused from its bearish decline (USD/SGD testing 1.33) although not bullish in a full-blooded way. EUR has slipped to test 1.21, USD/JPY is challenging 106 limit, AUD is limited in its 0.78 challenge.
China’s challenge on the US is manifesting as exports limits of 17 rare earth metals critical to high-tech/strategic military (e.g. F-35 jets) assets. Contemplating challenging limits, the realization is having no limits to challenges is a greater risk.
Singapore Budget: Support, Sustainability & Equity
The point we make in our pre-Budget thoughts [“Tapered, Targeted & (Future-)Tilted”] is that despite a significantly tapered down deficit, the budget remains highly supportive. This bears repeating. So the fact that 2021 Budget deficit shrinks substantially to SGD11.0 billion (2.1% of GDP) from SGD64.9 billion (13.9% of GDP) in 2020 should not be erroneously conflated with a contractionary budget. Instead this reflects targeted support that encapsulates sustainability and equity.
Point being, SGD11 billion allocated to Covid relief (SGD2.9 billion will be funneled towards continued Jobs support) and SGD24 billion allocated over the next three years to “emerge stronger” take a holistic approach to maintaining jobs/skills enhancement and capital investments to boost value. That is to say moving away from indiscriminate “kitchen sink” reflex to considered, sustainable support that lifts capabilities and ultimately leads to self-sustaining bump up in growth potential.
Not only is this equitable in aiding to level an uneven recovery, but critically, an equitable use of public funds to ensure value enhancements to avoid throwing good money after bad. A shift back to revenue financing, weaning off reserve drawdown* reflects fiscal sustainability (self-explanatory) and equity (in ensuring sufficient reserves for future resilience/emergencies).
But sustainability does not just pertain to ensuring a sustainable recovery within the constraints of sustainable public finances; it also pertains to “green” initiatives which this budget doubles down on via various tax measures and financial/investment incentives and co-investments.
Meanwhile, the “green” and infrastructure bonds announced will deepen markets for sustainable investments in “sustainability” and ensure equitable funding in terms of risk-sharing.
*Of the SGD11 billion being used from reserves this budget, only SGD1.7 billion is additional drawdown, with SGD9.3 billion from unutilized reserve drawdown from 2020. So this takes total reserve drawdown to SGD53.7 billion from SGD52 billion invoked in 2020.
FOMC Minutes: Playing Dovish Defense
The FOMC decision to defer to (USD1.9 trillion) fiscal stimulus is widely understood and validated. A high chance of this fiscal stimulus being passed in its intended form means that the Fed can indeed wait and watch; whilst maintaining the current policy accommodation (plans) of prolonged ZIRP (until 2023/23) and USD120 billion of QE at least through the rest of 2021.
Admittedly, the case for not rushing further stimulus is not compelling; quite the opposite. Concerns of inflation break-out at some point as a consequence of unprecedented monetary-fiscal stimulus combo may require the Fed to defend its policy of accommodation. But the Fed has deflected these fears; with Powell reiterating unwavering policy support. And so the Fed Minutes will not be examined for the decision. Instead, clues on more quantifiable catalysts for policy shift will be the focus. If there is any impact on yields, it may be tilted to shaping of the yield curve than derailing upward yield trend.
Credit Source: Mizuho Bank Ltd
