April IP of Singapore came in weaker than expectations, declining 8.7% y/y, well below consensus ( -3.6%). On a seasonally adjusted m/m basis, output fell 5.8%. However, the bulk of the weakness was in the notoriously volatile pharmaceutical sector; stripping this out, industrial production was much closer to expectations at -1.9% y/y and -2.2% m/m sa – still weak, but not as bad as the headline suggests. Indeed, outside of pharma, both electronics and chemicals posted m/m gains. At the same time, leading indicators, such as the EDB’s business expectations survey, point to a cyclical recovery in manufacturing over the next few quarters, while the second estimate of Q1 GDP, released this morning, showed the manufacturing sector did not start the year as badly as initially feared. Given the less dovish tone of the April MPS, analysts continue to believe additional changes to the SGD NEER policy band are unlikely and would only expect changes in the event of a significant darkening in the growth outlook. Delving into the details, the main driver of the downside surprise was a 38.0% y/y plunge in pharmaceuticals output (-21.3% m/m sa). While a significant fall in output, the EDB cited no special factors; the sector is notoriously volatile, and a rebound in output is likely to seen in subsequent months. Elsewhere, electronics output expanded 2.3% m/m sa, only partly reversing the 7.9% decline in March; the EDB cited an improvement in export demand driven mainly by electronic modules and components. Meanwhile, last month’s plunge in semiconductor output was revised upward, with output now estimated to have contracted 12.9% rather than 21.4%, while in April output recovered marginally by 3.2%, suggesting the weakness in semiconductors may well prove temporary. Petrochemicals also saw an improvement, though the pace of growth moderated, with output expanding 0.6% m/m sa (March: 2.0%; February: 3.5%). This follows an expansion of capacity after the end of maintenance related shutdowns at the end of 2014.Overall, analysts expect IP to show clearer signs of a recovery in Q2, as Lunar New Year distortions and the impact of the US West Coast port strike fade. Chemicals output should remain strong, and the electronics sector is expected to see some benefit from stronger US capex, although the pass-through is likely to remain weaker than in the past, given Singapore’s role as a marginal producer in the Asian electronics supply chain. Against this backdrop, and with core services inflation likely to remain firm, the MAS probably keep policy on hold this year. The SGD NEER has dipped slightly below the midpoint of the trading band today, having held above mid for the past month, following yesterday’s weak inflation print. Barclays expects the SGD NEER to trade slightly below mid in the months ahead – closer to where analysts see its fair value.
The material has been provided by InstaForex Company – www.instaforex.com