Wed, 28th June 2017

Anirudh Sethi Report


Archives of “Central bank” Tag

IMF’s new program to preapprove emergency access to dollars

The International Monetary Fund will introduce a framework to mitigate currency crises by ensuring easy access to dollars without requiring the onerous structural reforms that have marked past rescue programs.

This arrangement is intended mainly to deal with capital-account crises — currency collapses triggered by severe capital flight. With money likely starting to return to the U.S. as the Federal Reserve pivots from monetary easing, the IMF worries that corresponding outflows from emerging economies could drag down their currencies. Collapsing currencies can give rise to financial crises as foreign-debt loads soar. The situation could be made worse, if speculators take advantage of the situation to make quick profits.

 A country dealing with a capital-account crisis must intervene frequently in foreign exchange markets to prop up its currency by selling dollars. The new arrangement being developed by the IMF will help countries borrow greenbacks, mainly via short-term loans maturing in a year or less.

The IMF will evaluate potential borrowers under normal conditions, looking at such data as their current-account and fiscal balances, and let them join the framework if they are deemed sufficiently healthy. Loans will be limited based on each country’s capital contribution to the fund, among other factors.

China’s holdings of US Treasuries bounce back to six-month high

China’s holdings of US Treasuries rose for the third straight month in April, reaching the highest level since October 2016 at $1.09tn, as weakness in the country’s currency has begun to show signs of stabilising.

It comes after a period of sustained selling by Beijing, with 2016 marking the largest cut to China’s treasury holdings on record. The cut to China’s holdings came as Beijing sought to support the renminbi and manage capital flight by intervening in foreign exchange markets.

So far this year the renminbi has strengthened and China has tentatively returned to the Treasury market, buying $41.1bn of securities since January, with $4.6bn added in April. Still, the country’s holdings remain well below levels at the same time last year of $1.24tn, leading to it slipping into second place behind Japan as the largest foreign holder of Treasuries.

Overall, foreign holders shed $28.6bn bring the total foreign ownership of Treasuries to $6.07tn.

Key economic releases this week

For week starting June 12, 2017

The week ahead will be highlighted by the FOMC meeting on Wednesday at 2:00 PM ET/1800 GMT.

The Federal Reserve is expected to raise rates by 0.25% basis points and target 1.25% to 1.50%. This would be the 4th increase in the unwind for the Fed.  The Fed will also give their projections on GDP, employment, inflation and the projection of rates going forward.   They may also give more detail on tapering QE. 

Other key events:


UK CPI 4:30 AM ET/0830 GMT.  The expectation is for YoY to remain unchanged at 2.7%. The Core is expected to decline to 2.3% from 2.4%. MoM is expected to increase by 0.2%.

US PPI for May, 8:30 AM ET/1230 GMT. The US PPI is expected remain unchanged MoM and dip to 2.3% YoY (from 2.5% last).  Ex food and energy the MoM is expected to rise 0.2% vs 0.4% last and remain at 1.9% for the YoY


UK employment statistics will be released at 4:30 AM ET/0830 GMT.  The employment change (3M/3M) is expected to rise by 125K vs 122K last month. The Unemployment rate is expected to remain unchanged at 4.6%.  Average hourly earnings are expected to remain unchanged at 2.4%. 

US CPI for May, 8:30 AM ET/1230 GMT.  US CPI for May is expected to remain unchanged at 0.0% (0.2% last month). Ex Food and energy expected to rise by 0.2%. YoY is expected to decline to 2.0% from 2.2% last month with Ex food and energy remaining unchanged at 1.9%.

US retail sales for May, 8:30 AM ET/1230 GMT.  US retail sales for May is expected to increase by 0.1% for the month (vs +0.4% last month).  The ex auto is expected to rise by 0.1% (vs 0.3%). The control group is expected to rise by 0.3% vs 0.2% last.


Upcoming Week :Central banks in the spotlight

This week, it’s all about the central banks, and monetary policy-watchers will have their plates full with decisions on deck from the US, UK, Russia and Japan.

Here is what investors will be watching in the days ahead:

US Fed

The real focus will be on Fed chair Janet Yellen’s press conference following the meeting. She is likely to give some insight into how the Fed perceives the mixed bag of economic readings and whether that will knock the central bank off of its expected path for the year.

There could also be some adjustments on tap for the Fed’s inflation or unemployment projections in light of recent data. And, more importantly, Ms Yellen may offer some insight on the Fed’s plans for starting to reduce the size of its $4.5tn balance sheet, which bank officials have been teasing for several months now. The biggest question analysts are asking is whether that plan gets debuted at the September meeting or if central bankers would prefer to wait until December.

UBS economists offered this to help read the tea leaves next week:

$ 16 Billion : Global bond funds enjoy largest weekly inflow since 2015

15BILLIONInvestors poured nearly $16bn into global bond funds in the week to June 7, the largest weekly inflow to the asset class in more than two years, as portfolio managers stared down the UK election, European Central Bank meeting and the closely watched testimony of former FBI director James Comey.

The figure was propelled by billion-dollar plus inflows to US and Western European sovereign bond funds, according to EPFR. Investors added roughly $9bn of the $16bn to US government bond funds.

Cameron Brandt, the director of research for EPFR, said that the investors “put safety over returns” ahead of the trio of potentially market moving events.

Switzerland May forex reserves CHF 693.7 bln vs 696.65 bln prev

Switzerland May forex reserves report 7 June

  • prev revised up from CHF 695.94bln

Full details from the SNB here

Reduced reserves following on from yesterday’s reduced domestic sight deposits suggesting less “smoothing” required by SNB for the moment.

USDCHF unchanged at 0.9632 but supported still down here I think the SNB still interested to make a presence/cast a shadow if nothing else. EURCHF also finding dip-demand and currently 1.0856

Here Are The Seven “Black Swans” SocGen Believes Could Shock Global Markets

As part of its periodic Global Economic Outlook, SocGen traditionally includes a discussion of what it views are the biggest “black swans” both to the upside and the downside, and the latest just released edition titled “On a Plateau”, which took a rather grim outlook to the world economy predicting that a US recession will likely hit in the not too distant future while “China, South Korea, Australia, US, Germany, UK and Japan are in the more mature phase of the cycle”, and that current global growth is “essentially as good as it gets”…

Draghi rules out QE for now

European Central Bank chief Mario Draghi took the wind out of the government’s sails on Monday, telling the European Parliament that the ECB will not consider including Greece in its quantitative easing program (QE) before the conclusion of its bailout review and its debt is made sustainable.

“First, let’s have an agreement, a full agreement, and let’s find measures that will make the debt sustainable through time,” Draghi told European lawmakers in Brussels, adding that he regretted that “a clear definition of the debt measures was not reached in the last Eurogroup.”

Draghi also said that after creditors agree on what sort of debt relief measures Greece will get, the Governing Council of the ECB will carry out its own “fully independent” analysis to see if the debt would also be sustainable in adverse scenarios.

His comments came as Prime Minister Alexis Tsipras said that Greece was hoping that there will be an initiative in June for “a definitive settlement of the crisis through a clear solution of reducing the debt.”

“Let there be a solution and let it come when it comes,” he said after his meeting in Athens with Estonian Prime Minister Juri Ratas, adding that the sooner the matter is solved the better. The tough road ahead for Greece was reflected in remarks yesterday by Finance Minister Euclid Tsakalotos, who said the country’s inclusion in QE is indeed “a difficult issue.” “The ECB, like our Lord, works in mysterious ways,” he told reporters.

Emerging Market :An Update

EM FX closed last week on a mixed note, with markets struggling to find a compelling investment theme. The US jobs data this week could provide some more clarity on Fed policy.  We still think markets are still underestimating political risk in the big EM countries, including Brazil (Moody’s outlook moved to negative), Mexico (election in state of Mexico), South Africa (ANC debates Zuma’s fate), and Turkey (ongoing crackdown on opposition).
Bank of Israel meets Monday and is expected to keep rates steady at 0.10%.  CPI rose 0.7% y/y in April, below the 1-3% target range.  With the shekel remaining firm, the central bank is likely to keep rates steady whilst continuing to buy USD/ILS.  
South Africa reports April money and private sector credit data Tuesday Both are expected to pick up modestly from March.  It reports April trade data Wednesday.  Q1 unemployment will be reported Thursday, and is expected at 27.0% vs. 26.5% in Q4.  SARB kept rates steady last week.  Next policy meeting is July 20.  If current trends persist, we think it will give a stronger signal that it could cut rates in H2.  Results of the ANC meeting are not yet known as of this writing.
Chile reports April IP Tuesday.  Central bank releases its minutes Friday, while April retail sales will also be reported.  The economy remains weak while price pressures remain low.  While the bank signaled that the easing cycle is over for now, we do not see tightening until 2018.  Next policy meeting is June 15, and rates are likely to remain steady at 2.5%.

FOMC meeting minutes: Balance sheet plan would raise rolll off caps every 3 months

Tightening likely appropriate soon” most Fed officials said

Other comments:
  • Prudent to only evidence a slowdown is transitory
  • Fed officials still saw gradual tightening as appropriate
  • FOMC expected consumer spending to rebound in coming months
  • Fed staff outline plan for gradual phaseout of reinvestment
  • Most Fed officials: inflation data reflects transitory factors
  • Nearly all Fed officials favorite staff proposal on rolloff caps
  • risks from some elevated commercial property values
  • a few Fed officials concern progress on inflation goal slowed
  • jobless rate of 4.5% at or below Fed officials long run levels
  • almost all Fed officials favor starting to shrink assets in 2017
  • deregulation could raise financial risks according to several Fed officials

The meeting minutes can be found here….