Mon, 25th July 2016

Anirudh Sethi Report


Archives of “central banks” Tag

Nearly 80% of analysts see more BOJ easing in July: survey

Many market analysts predict the Bank of Japan will further loosen monetary policy at its upcoming meeting, to bolster flagging inflation expectations and price trends, a recent survey shows.

Nikkei Quick News conducted a survey of “BOJ watchers” — economists at banks and brokerages who are familiar with the central bank’s thinking — on July 19-24. The results, released Monday, showed 22 out of the 28 analysts expected the BOJ to take additional easing steps at the monetary policy meeting scheduled for Thursday and Friday.

 Many BOJ watchers believe the bank will take interest rates further into negative territory and step up purchases of exchange-traded funds; few predicted more purchases of government bonds.

The government is set to put together its latest economic policy package as early as the end of July. Speaking to reporters in Chengdu, China on the sidelines of a meeting of the Group of 20 finance ministers and central bank chiefs, BOJ Gov. Haruhiko Kuroda said Saturday that if a government takes fiscal steps while a central bank is simultaneously easing monetary policy, it has a great economic impact. Kuroda reiterated the bank will take additional measures, if necessary.

ECB Keeps Rates Unchanged

As widely expected from the formulaic statement issued by the ECB ahead of Draghi’s press conference, the central bank announced moments ago that it kept all three of its interest rates unchanged as follows:

  • ECB keeps main refinancing rate unchanged at 0.00%.
  • Leaves deposit facility rate unchanged at -0.40%
  • Keeps marginal lending rate unchanged at 0.25%

The ECB’s full statement also confirms that “the monthly asset purchases of €80 billion are intended to run until the end of March 2017 or beyond if necessary and in any case until it sees a sustained adjustment in the path of inflation consistent with its inflation aim” 

At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.

Regarding non-standard monetary policy measures, the Governing Council confirms that the monthly asset purchases of €80 billion are intended to run until the end of March 2017, or beyond, if necessary, and in any case until it sees a sustained adjustment in the path of inflation consistent with its inflation aim.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.

Now attention turns to Draghi in 45 minutes where his press conference is expected to give some additional color on how the central bank will address the issue of rapidly disappearing collateral.

GBP & More…An Update

It is a bizarre turn of events.  Just like the Game of Throne’s Westeros is a map of the UK put on top of an inverted Ireland, so too do UK events seem to be a strange permutation of the pre-referendum views.  
Although sterling and interest rates have not fully recovered from the Brexit decision, equity markets have, and fear of contagion has died down.  Indeed, it appears the UK may not be in the back of the queue from trade deals after all, and the IMF’s more pessimistic scenario about the contagious impact has been significantly revisedaway.  
Today’s news seems consistent with this Brexit-ain’t-so-bad meme.  The employment report was stronger than expected and the BOE “agents summary of business conditions,” which is a bit like the Fed’s Beige Book, if a little more formal, found a little impact from the referendum on hiring and investment plans.  Two-thirds did not anticipate a negative impact over the next 12 months.  There was little evidence of impact on consumer spending or bank lending in the survey.   The decline in sterling is seen to benefit exporters, while perhaps also some import substitution.  
The UK unemployment rate slipped to 4.9% from 5.0% in the three months through May.  It is the lowest rate in a little more than a decade.  The number of people working increased by 176k, the most this year.  The number ofjobless fell 54k.  The claimant count increased by 400, a tenth of what was expected, but this was negated by the upward revision to the May claimant count to 12.2k from – 400.  Overall weekly earnings to 2.3% from 2.0%, but this was a function of bonuses, which, if excluded, slows earnings growth to 2.2% from 2.3%.  

The Entire Financial System Is Exposed To This ‘Junk’ Bond Market

Japan got there first. 15 years ago, we met a Japanese equity manager who made an astonishing prediction:

 “Japan was the dress rehearsal. The rest of the world will be the main event.”

That seemed an extraordinary suggestion 15 years ago. Today, not so much.

In the aftermath of the late 1980s real estate and stock market bubble, and its subsequent banking crisis, Japan became a giant laboratory experiment for novel insane monetary policies.

In 2001 the Bank of Japan tried Quantitative Easing. It was a policy that Richard Koo of the Nomura Research Institute described as the “greatest monetary non-event”.

It turned out, not for the first time, that academic economists had it all wrong.

“It’s Prohibited By Law” – A Problem Emerges For Japan’s “Helicopter Money” Plans

Over the past four days, risk assets have been on a tear, led by the collapsing Yen and soaring Nikkei, as the market has digested daily news that – as we predicted last week – Bernanke has been urging Japan to become the first developed country to unleash the monetary helicopter, in which the central banks directly funds government fiscal spending, most recently with an overnight report that Bernanke has pushed Abe and Kuroda to sell perpetual bonds, all of which would be bought by the BOJ.

There may be a very big problem with what the market is pricing in, however. As Reuters reports, citing government and central bank officials directly involved in policymaking, “there is no chance Japan will resort to helicopter money.” The problem: it is prohibited by law to directly underwrite government debt, which means parliament needs to revise the law for the central bank to start directly bank-rolling debt.

Adopting helicopter money in the strict sense is impossible as it’s prohibited by law,” said one of the officials. “If it’s about the BOJ buying huge amounts of bonds and the government deploying fiscal stimulus, we’re already doing that.”

Bernanke tells Japan’s Abe to continue Abenomics push

Former Federal Reserve Chairman Ben Bernanke on Tuesday urged Japan’s Prime Minister Shinzo Abe to keep pushing to decisively defeat deflation, according to an adviser to Mr. Abe.

At a face-to-face meeting, Mr. Bernanke said Mr. Abe’s growth measures have worked well so far, adding that he wanted Tokyo to push through with Abenomics to end a negative cycle of price growth, according to special adviser Koichi Hamada.

 Mr. Hamada, a Yale University professor emeritus, attended the meeting.

Mr. Abe told the visiting former Fed chief that the Bank of Japan’s monetary easing has been working and that Abenomics “will work even better if we add fiscal spending” to it, according to Mr. Hamada. Mr. Abe is widely expected to compile a large-scale fiscal package in the autumn that his aides and officials say will likely top Y10 trillion.

Emerging Markets -An Update For This Week

EM and other risk assets rallied on Friday after the strong US jobs data.  It appears that markets are pricing in a benign backdrop for risk near-term; that is, the US economy is recovering but not by enough to warrant an imminent Fed rate hike.  The July 27 meeting seems unlikely, and so the next likely window would be September 21.  Yet EM typically weakens in the run-up to FOMC meetings and so investors should be very careful about taking on too much risk.
China has been on the back burner leading up to the Brexit vote and in its aftermath.  It reports a slew of data this week, which are all expected to show continued but modest slowing.  This benign scenario could be tested, especially if the Chinese equity or FX markets get more volatile.  The central banks of Korea, Malaysia, Chile, and Peru all meet this week.  No action is expected from any of them, but there are small dovish risks from Korea and Malaysia.
China is likely to report June money and loan data this week, but no date has been set yet.  Over the weekend, CPI and PPI came in at 1.9% y/y and -2.6% y/y, respectively.  China reports June trade Wednesday, with exports expected at -5.0% y/y and imports at -6.2% y/y.  June IP and retail sales will be reported Friday, with the former expected to rise 5.9% y/y and the latter to rise 9.9% y/y.  Q2 GDP will also be reported, with growth expected at 6.6% y/y vs. 6.7% in Q1. 

Now, Comptroller and Auditor General of India wants to audit RBI

In a rare public appearance, the Comptroller and Auditor General of India (CAG) Shashi Kant Sharma added a new dimension to the multiple discourses going on about the central bank and the banking system in the country.

Delivering the key note address at a conference on Financial and Corporate Frauds organised by industry body ASSOCHAM in New Delhi today, Sharma sprang a surprise saying that there was a need to consider CAG audit for financial regulators like the Reserve Bank of India (RBI). He also suggested that a good portion of the so-called bad loans could have found their way outside the country and might never be recovered.

Though the proposal had been floated in the past, the CAG’s observations assume significance coming at a time when the banking sector is reeling under severe stress caused by bad loans and the government is in the process of selecting a new governor for the central bank, whose policies have faced criticism from certain quarters.

Sharma, who completed three years as the national auditor in May, referred to the way advance markets such as the US and UK have dealt with the issue.

Three-year term is short for RBI Governor: Rajan

Reserve Bank of India (RBI) Governor Raghuram Rajan, whose three-year term comes to an end in nine weeks, on Thursday pitched for a longer tenure for the central bank head, saying the global practice has to be emulated in India as well.

Rajan, who briefed Parliament’s Standing Committee of Finance on various aspects of economy and nonperforming asset (NPA) in banks, was asked by members on what should be the tenure of the RBI Governor, sources said.
He told the members that a three-year term is “short”.

On whether it should be five years, Rajan is believed to have cited the case of US Federal Reserve.

In the US Fed, in addition to serving as members of the Board, the Chairman and Vice-Chairman serve terms of four years and may be reappointed to those roles who in turn serve until their terms as Governors expire.

Rajan, whose current three-year tenure ends on September 4, has already said no to a second term.

ALERT- A Staggering $11.7 Trillion In Negative Yielding Debt

Global government debt with negative yields has increased by more than a trillion dollars since the end of May after the UK’s Brexit vote sent investors scrambling for safe haven assets.

The amount of sovereign debt with negative yields, meaning if investors hold the bonds to maturity they will get back less they put in, was $11.7tn on Monday, a rise of $1.3tn since the end of May, according to data from Fitch Ratings.

Frenzied demand for high-rated government debt in the wake of Great Britain’s vote to part ways with the EU have sent sent yields a swath of haven bonds plumbing new lows.

“Worries over the global growth outlook, further fueled by Brexit, have continued to support demand for higher-quality sovereign paper in June,” Fitch said.

Strikingly, debt of increasingly long maturities has fallen into negative-yielding territory, with the level of bonds with maturities of seven years or more swelling to $2.6tn from $1.4tn at the end of April.