Asia’s inflation risk: Beware of upside surprises - Nomura

Research Team at Nomura, suggests that the CPI Inflation looks set to rise in Asia, initially driven mostly by base effects and higher prices of some soft and bulk commodities.

Key Quotes

“Our model predicts inflation to rise more than consensus forecasts, even if commodity prices hold stable from here, notably in China, Hong Kong, Korea and the Philippines.”

“If the CRB broad composite measure of oil, hard and soft commodity prices rises a further 20% by Q4 2017, our model predicts inflation to overshoot the 2017 consensus forecasts in seven of the 10 Asian countries.”

“Our base case is for Asian inflation to stay low next year for five fundamental reasons. However, our conviction level is not high. This is in part due to our model’s predictions, but also there is a lengthening list of fundamental counter-arguments, including President-elect Trump following through on his campaign pledges. Rising US protectionism and heightened threats to regional security could disrupt Asian trade flows and weaken its currencies, fuelling cost-push inflation.”

“Rates strategy: We suggest investors express the reflation theme through swap steepeners in Asia. We like swap steepeners in India, Korea, Taiwan and Thailand.”