Thread by @Trinhnomics

Good morning 🦘🇦🇺 - a lot to cover today:

*Australia now has RBA cash rate 100bps lower than USD at 0.75% as the KING of Asia household debt wants to help consumers (they got floaters for mortgages & defo not paying sub 1%)

*Global manufacturing contracting, yep, true story. 🥶

https://twitter.com/Trinhnomics/status/1178535152256860160

Question: Where are we???

We are here 👇🏻👇🏻👇🏻 Global contraction of manufacturing (this is a soft indicator so hard data may not realize). Still, sentiment impacts investment.

What happened? We knew that Asia & Euro zone has been in contraction but the US is exceptional no more!

Note that this is MANUFACTURING. But manufacturing is not inconsequential & vary depending on the country (massive for Germany & Korea & less so for the US or India for example). Below are details of USA ISM -> sector is contracting based on soft data & the economy still growing.

Let's look at the anecdotal evidence & sectoral impact. Three sectors still growing: miscellaneous manufacturing, food & bev & tobacco & chemical.

Seems like electronics are the one biggest hit by cyclical & also trade-war. By the way, knew this from Asian data as Korea is down!

Speaking of Korea, well, well, well, let's just say the data is not showing green shoots:

* Exports falling again in September by -11.7% from -13.8% in August & imports down -5.6%. This is mostly due to the China & electronics (semiconductor);
* Markit manu falls further
* CPI..

Okay, Korea already got DEFLATED PPI (-0.6%YoY) but CPI just went into deflation too at -0.4%YoY from 0% & that is despite a MoM pickup so somewhat a base effect here but no matter what it is LOW & reflecting WEAK GROWTH.

So the Bank of Korea will cut rates. Household debt high!

Note that the BOK said that it is very concerned about the high household disposable income ratio to household debt (160%) & rising household debt so it wants to cut to help but worried would spur more debt.

Korea lack of social security, worsening job market + aging = debt 📈

Rates in Korea will have to fall as the BOK has no other choice but to address its 2% CPI target (supposed to cut if CPI deviates for longer than 6 months).

Anyway, regarding India, the RBI meeting is this Friday. Last time, the RBI cut rates by 35bps & rate cut'll come Friday👇🏻

Okay, let's look at real rates in India - CPI is 3.2%YoY & policy rate is 5.4%

We can see that REAL RATES are high in India & have been high since 2014.

Markets are expecting a 25bps cut but we think why not 40bps? Just take this to 5%. 👇🏻👇🏻👇🏻

We have a Natixis Monetary Condition Index & rates in India tight. With the Fed expected to cut in December & Q1 2019, the RBI should cut further to help ease funding conditions. I don't see why not. Oil is not an issue. CPI is not an issue. That 10% tax cut not gonna pay itself.

For those reading the CONTRACTING MANUFACTURING as symptomatic of trade-war, I say no. Trade-war is the factor that tips it over the edge but what we have here is a STRUCTURAL TREND. Why?

The double Ds - debt & demographic 👇🏻👇🏻👇🏻

https://twitter.com/Trinhnomics/status/1177041614268534784?s=20

Debt in Asia 👇🏻👇🏻👇🏻

Question: What happens next?

You bet not more leverage for Chinese firms. Not more leverage for Australian households, Korean, Thai, Malaysia. If they lever, it is likely just to pay down debt not to accelerate CONSUMPTION.

Yep.

https://twitter.com/Trinhnomics/status/1178525388063924225?s=20

@nickmuchi asked a good question:

What is the historical relationship b/n manu & non-manu?

Let's look at the chart below. You can see that manufacturing is much more volatile than services & services remain resilient. Manufacturing dipped in 2015 & 2012 while services sticky 👇🏻