AP STRATEGY: KEY EVENTS: FOMC DECISION; IBK RESULTS - MALCOLM WOOD
Asia Events - Singapore Trade, Taiwan Export Orders & RBA Governor Speech: We forecast Singapore's NODX growth to pick up further to 8.3% YoY, though downside risks to external demand could undermine export growth in late 2007 or early 2008. RBA Governor Stephens' comments are expected to reveal a hard-line attitude toward the market turmoil. See page 2 for details.
Asia Earnings - Agile Property, Fosun, China Coal, Henderson Land, Sino Land & Coles Group Results: Consensus EPS growth expectations for AP ex-Japan in 2007 and 2008 are 15.5%Y (vs. 15.1% last week) and 10.9%Y (the same as last week), respectively. Asia is trading on 16.4x 07 and 14.8x 08 consensus earnings estimates.
International Economic Events: FOMC & BOJ Rate Decisions, US CPI & Housing Data: We expect the Fed to cut rates by 25 bps, while the BOJ is likely to leave rates unchanged. US Housing Starts are expected to fall another 2.2% MoM to 1.35k. See page 3 for details.
International Earnings - US Investment Banks, Best Buy, Oracle, FedEx & General Mills Results: Consensus EPS growth expectations for the S&P 500 are 8.5%Y in 2007 and 11.7%Y in 2008. The S&P 500 is trading on 15.5x 07 and 13.9x 08 consensus estimates. See page 3 for details.
Market Performance - Equities Flat: Global equity markets were mixed last week, with the US up 0.4%, Europe down 0.4% and Japan down 2.9%. Asia-Pac ex-Japan was flat, with Hong Kong (+4.8%) outperforming, while Korea (-2.1%) and the Philippines (-1.9%) lagged. The US 10-year bond yields declined by 5 bps. Most Asian currencies strengthened against the US dollar, with the NZ dollar rising 3.8%. WTI oil price rose a further 5% to a record US$80.1/bbl. Base metal prices gained, with copper up by 2.5% See pages 4-8 for details
US ECONOMICS: BUSINESS CONDITIONS: HEADLINE IMPROVEMENT MASKS UNDERLYING DETERIORATION - SHITAL PATEL
What's New: The MSBCI gained eight points in early September to 38%, retracing half of August's stunning 17-point plunge. But deterioration in survey details augurs weakness. Among them: Advance bookings edged down by two points to 48%, while the business conditions expectation index plunged nine points to 40%.
Conclusions: The overseas-domestic results dichotomy extends to the bottom line. Earnings at those S&P 500 companies for which international sales account for more than 25% of total sales (roughly half of the S&P 500) are expected to grow 6.8% in 3Q07 versus 1.3% for the domestically-focused companies, based on consensus estimates.
Market Implications: Ongoing weakness in business indicators continues to spur expectations of aggressive Fed ease, steepening of the yield curve.
Risks: Although pricing conditions didn't change much from last month and commodity prices have risen 3.6% from a month ago according to the GSCI (3.5% ex-energy), prices charged have risen faster than unit costs for 34% of the companies, up from 26% last month. Similarly, 59% of analysts expect margins to expand in 2007, up from 51% last month. Analysts may be overly optimistic given these trends.
SEMICONDUCTORS: GLOBAL SEMICONDUCTOR WEEKLY - LOUIS P. GERHARDY
Last Week-Top and Bottom Performers Globally: SiRF +16% (GPS chip maker), Solomon Systech +8% (handset display driver IC supplier in Hong Kong), and Motech +7% (Taiwan solar manufacturer) were the best performers in our global semiconductor universe in the last week. Richtek 13% (Taiwan power management IC supplier faced concerns on double ordering), Sandisk -10% (NAND-flash memory maker), and International Rectifier -10% (power discrete and IC supplier with accounting problems) were the worst performers in our global semiconductor universe in the last week.
YTD-Top and Bottom YTD Performers Globally: JA Solar +122% (solar cell manufacturer in China), LDK Solar +102% (solar cell manufacturer in China), and Mediatek +84% (Handset and advanced TV IC maker in Taiwan) are the best YTD performers in our global universe. ViMicro -56% (vendor of handset media processor ICs based in China), Core Logic -53% (handset camera ICs based in Korea), and Mtekvision -44% (Korean camera control processors for camera phones) are the worst YTD performers.
Technology Sector Performance (Exhbiit 5): We expect a strong Q3 earnings season will serve as a catalyst for strength in semiconductor shares, but our confidence in the 2008 industry outlook has diminished somewhat and will also likely cap a short term rally. The semiconductor stocks in our N. American universe advanced 0.2% last week versus a 2.1% increase in the S&P500 and a 1.4% increase in the NASDAQ.
Industry Observation: Channel inventory appears low and the rise in semiconductor company inventory appears to represent a structural shift not a cyclical problem. Investors appear to have discounted much of the positive 2H seasonality but the global credit crunch has increased the uncertainty into the 2008 semiconductor industry outlook.
DOWNUNDER DAILY : IT'S SLOW, BUT IT'S HAPPENING...- GERARD MINACK
It's happening slowly, but it does seem that the US consumer is weakening. The monthly data are noisy, but Friday's retail sales data show that real sales increased by just 0.75% at annual pace over the three months to August (I've assumed no retail-level price increase for the August month). The broader personal consumption expenditure series increased by 1.4% over the three months to July, down from 3.7% in the March quarter.
Detecting a change in trend, even when looking at growth over three months, is not straightforward. In particular, swings in real consumer spending are clearly affected by the swing in energy prices. Exhibit 1 shows the rolling three-month growth in real sales and a rolling three-month change in energy costs (inverted, so the line goes down when energy costs go up).
But not all the slowdown in real spending reflects an energy-inspired price squeeze. Nominal spending is also slowing at the margin: the dollar value of sales was up only 2.4% saar in the three months to April, while PCE was up 5.3%% in the three months to July, down from a recent peak of 7.3% in the March quarter. (This can be erratic: this series fell to 2.1% in the three months to last November.)
Moreover, energy prices were not a factor in the softer-than-expected July sales report. Despite the recent increase in oil prices, petrol (gasoline) prices were sharply lower in August compared to July (Exhibit 2).
The most immediate implication of this is that it builds the case for the Fed to ease policy on macro-management grounds. A softer consumer almost always leads to a broader slowdown, for example amongst goods-producers (Exhibit 3). Our US team expects the Fed to ease by 25 points at this week's FOMC.
ASIA/PACIFIC WEEKLY PREVIEW: TUMBLING EXTERNAL DEMAND? - DENISE YAM
Singapore-August Trade (Sep 17): August trade data are likely to continue to register strong momentum. We believe the next few months' data are likely to remain healthy as well. However, downside risks to external demand could pose a threat to export strength in late 2007/ early 2008, in our view.
Australia -RBA comments will be the obvious focus. So far other central bankers - notably in Europe and the UK - have taken a hard-line attitude on market turmoil. We expect Glenn Stephens to have the same attitude.
A Fed cut could help regional equity markets but effect on economies less impressive. Based on option pricing, the market is assigned a 50% chance of a 25bp cut, a 42% chance of a 50bp cut and an 8% chance of a 75bp cut – there is absolutely no probability of the Fed keeping rates on hold. One month ago, the probability of a 50bp cut was only 5%. If the Fed does cut, will that help Asia? The answer depends on why they are cutting.
- If the Fed cuts rates to ease money market problems that were not spilling over to the US economy, Asian economies and currencies could pick up strength. Lower US rates would boost US demand for Asian exports and also improve rate differentials (typically helping boost currencies). In some cases, possibly with a lag, lower US policy rates would also translate into lower domestic rates, and help boost activity.
- However, in our view, the Fed is not responding solely (or even mainly) to the money market problems. Rather, they are likely to cut rates in response to clear signs of a deteriorating economy. In this case, the net impact on Asian activity is unlikely to be positive – the boost from lower US rates is unlikely to outweigh the impact from activity.
Last month, when we estimated the hit to Asian growth from a US slowdown, we already incorporated the average US rate response in the calculations. As a result, even if the Fed cuts rates on Tuesday, we still estimate that a 1ppt further slowdown in US consumption (beyond our baseline) would nudge down Pan-Asian growth by 0.3ppts to 6.9% in 2008, from 7.2% in our baseline, and 7.6% in 2007. For more details, please see the original piece:
