Wed, 24th August 2016

Anirudh Sethi Report


Archives of “central banks” Tag

In Surprising Twist, Global Central Banks Dump A Record $335 Billion In US Debt In Past Year

On Sunday, when looking at the latest update of the Fed’s custody holdings of Treasuries, we noted something troubling: the number dropped sharply, declining by over $17 billion, bringing the total to $2.871 trillion, the lowest amount of Treasuries held by foreigners at the Fed since 2012.

We added that “while TIC data released this Monday will give us some much needed, if substantially delayed, data on reserve manager activity as of June, the hypothesis is that OPEC countries such as Saudi Arabia  are once again quietly selling Treasuries to raise cash in an environment of low oil prices and the consequent budgetary tightness.”

After getting the Treasury International Capital (TIC) data, we can confirm that something strange is taking place in the US Treasury market, in fact something that is the complete opposite of what one would expect by looking at the relentless Indirect bidder demand in government bond auctions. Because, based on TIC data, foreign investors – both official and private – were sellers of $32.9 billion Treasury notes and bonds in June. Narrowing the selling down to just official entities, i.e. mostly central banks, but also SWFs and reserve managers, brings the total to $33.5 billion.

RBI should continue with Raghuram Rajan’s policies on inflation: Moody’s

Governor Raghuram Rajan’s policy of tight leash on inflation has showed results and the Reserve Bank should continue with similar policies and communication going forward, Moody’s Investors Service has said.

Moody’s Investors Service Senior VP Sovereign Risk Group Marie Diron said credibility and effectiveness of monetary policy are factors which impact India’s sovereign ratings. Moody’s has a ‘Baa3’ rating on India, with a positive outlook.

“In the last two years, India’s inflation has fallen to more moderate levels, likely in part because of more credible monetary policy that has anchored inflation expectations. We expect the RBI to continue with similar policies and communication, showing commitment to achieve its inflation target,” Diron told PTI.

A monetary policy with tight leash on inflation is important especially in India, where in the past inflation has risen to very high levels, negatively affecting growth and investment prospects.

Rajan, who demits office on September 4, has been pilloried by his critics for keeping interest rates high and has also been accused of stifling growth.

Raghuram Rajan had challenged these critics to show how inflation is “very low” before accusing him of “being behind the curve” in his focus on containing price rise than on growth.

A German Bank Finally Caves: Will Charge Retail Investors A Negative 0.4% Deposit Rate

On June 5, 2014 when the ECB officially announced that the rate on its deposit facility would go negative, we posted “NIRP Has Arrived: Europe Officially Enters The “Monetary Twilight Zone.” However, while NIRP has already led to a dramatic upheaval across Europe’s economies as a result of a perfectly “unexpected” surge in the savings (as we warned would happen last October, and as the WSJ “discovered” last week) one key aspect of this “zone” was missing for the past two years: banks charging negative rates to ordinary, retail depositors.

However, after a two year wait, this final piece of the NIRP puzzle was revealed when earlier this week, Raiffeisen Gmund am Tegernsee, a German cooperative savings bank in the Bavarian village of Gmund am Tegernsee, with a population 5,767, finally gave in to the ECB’s monetary repression, and announced it’ll start charging retail customers to hold their cash.

Starting September, for savings in excess of €100,000 euros, the community’s Raiffeisen bank will charge a 0.4% rate. That represents the first direct pass through of the current level of the ECB’s negative deposit rate on to retail depositors.

India – Public sector banks’ stressed assets double to Rs 5 lakh cr

Toxic assets at a clutch of 22 public sector banks (PSBs) have doubled to Rs 5.51 lakh crore in the June quarter over Q1FY16, reports Pranay Lakshminarasimhan in Mumbai. The consequent surge in provisions has impacted their bottom lines; the banks have posted a combined loss of R979.90 crore compared with a collective net profit of Rs 9,448.90 crore in Q1FY16. Bank of India, UCO Bank and Central Bank of India were among the lenders who reported a loss in the June quarter.

The rise in gross non-performing assets (NPAs) — especially on the books of PSBs — is mainly due to the asset quality review (AQR) conducted by the Reserve Bank of India last year. The AQR required banks to identify stressed assets and provide for them, because of which both bad loans and provisions surged over the last few quarters. The central bank has urged lenders to provide for emerging stress as well.

Around two dozen accounts had been identified by lenders for strategic debt restructuring; in the last couple of quarter several of these accounts have turned non-performing following the inability of banks to initiate the scheme.

BOJ medicine may be too strong for quiet summer stock market

Japanese stock trading is typically thin in August. Thus, the Bank of Japan’s purchases of exchange-traded funds may exert a disproportionately large and potentially unwelcome influence on the Tokyo stock market this month, observers say.

The Nikkei Stock Average closed at 16,735, down 29 points on Wednesday. At one point, the benchmark average dropped as much as 107 points, but shares came off their lows as investors bet the central bank may buy ETFs for the first time since Aug. 4.

 The market move may signal concern that the central bank’s purchases of ETFs will distort the market, as trading thins in August and the BOJ holds its buying steady. That would give the bank greater sway in the market.

If speculators dominate, anticipating BOJ buying, it may discourage longer-term investors. Some observers argue the central bank should rethink the ETF purchases at its next monetary policy meeting in September.

Overseas, stocks rose on Tuesday, as the markets “have incorporated risks that many participants were wary about,” according to Diam Co. Germany’s DAX hit a year-high, while the tech-heavy Nasdaq composite topped its all-time high.

As a period of risk aversion ends, investors are on the lookout for market movers.

BOE bond-buying programme hits trouble

The Bank of England’s new bond-buying programme ran into trouble on its second day of operations on Tuesday, as pension funds and insurance companies struggling with a deepening funding crisis refused to sell gilts to the central bank.

It started off well enough.

On the first day of the Bank of England’s resumption of Gilt QE after the central bank had put its monetization of bonds on hiatus in 2012, bondholders were perfectly happy to offload to Mark Carney bonds that matured in 3 to 7 years. In fact, in the first “POMO” in four years, there were 3.63 offers for every bid of the £1.17 billion in bonds the BOE wanted to buy.

However, earlier today, when the BOE tried to purchase another £1.17 billion in bonds, this time with a maturity monger than 15 years, something stunning happened: it suffered an unexpected failure which has rarely if ever happened in central bank history:only £1.118 billion worth of sellers showed up, meaning that the BOE’s second open market operation was uncovered by a ratio of 0.96.  Simply stated, the Bank of England encountered an offerless market.

Next Week -Watch out 5 Events

Now that the BOE is over and the US employment report has come and gone, what next from a fundamental standpoint.  Below are the top 5 economic releases/events in the new trading week starting August 8th
  1. RBNZ interest rate decision (5 PM ET/2000 GMT Wednesday) – The Reserve Bank of New Zealand will announce there interest rate decision on Thursday (locally in New Zealand).  All 15 economists surveyed by Bloomberg are expecting a cut of 25 basis points to 2.0% from 2.25%.   With the RBA easing conditions this week to 1.5% from 1.75%. In an interesting twist, the decision will be announce on Twitter and not released during a normal briefing before the release time. The reason is the March statement was released by a reporter before the official release time.   
  2. UK Manufacturing Production (4:30 AM ET/1130 GMT).  The UK manufacturing production data for the month of June will be released on Tuesday. The expectation if for a -0.2% MoM. The data is for the month of June.  Going forward, the markets will be more focused on the UK data. Although this is for June, it will be a baseline for before and after Brexit.
  3. US Retail Sales. (Friday, 8:30 AM ET/1130 GMT). The US retail sales report for the month of July will be released with the expectations for the headline to show a +0.4% gain, the control group +0.3% (vs +0.5% last month), Ex Auto +0.2% (vs. +0.7%) and Ex Auto and Gas (+0.4% vs +0.7% last month). We have jobs. Will we get spending?
  4. China Trade Balance (Monday):  China trade balance is tentatively expected to be released on Sunday in the US/Monday in China. The expectations is for a surplus of $47B/CNY 312B.  
  5. German GDP 2Q (Friday 2 AM ET/0600 GMT).  Germany Prelim GDP for the 2Q will be released on Friday. The expectation is for a slowing to 0.2% from +0.7% in the 1Q.  the EU Flash GDP will also be released on Friday with estimates for a 0.3% gain.
Put on the calendar:

Monetary easing row reveals divisions within Beijing

The public drama played out between Beijing’s top economic planning agency and the central bank over monetary policy highlighted rifts within China’s government that could affect the ruling Communist Party’s personnel affairs.

The National Development and Reform Commission issued recommendations that day for boosting investment in China, including cutting interest rates and lowering banks’ reserve requirements at an appropriate time. Chinese stock prices jumped after the statement was published.

 The People’s Bank of China and the NDRC, whose duties include investment authorizations, are both part of the government — but neither has power over the other. It is rare for another government agency to push the central bank toward monetary easing, and even less common for such comments to be made in public.

Lu Zhengwei, chief economist of the Industrial Bank, said the NDRC statement contains a political signal. Many viewed it as a sign of the growing pressure the central bank faces calls grow within the government for monetary easing.

But the central bank, which announced in the afternoon that it held a meeting with the heads of local branches, made no mention of monetary easing and simply said it planned to maintain a prudent policy for the rest of the year.

Why Japan’s “Massive” ¥28 Trillion Fiscal Stimulus Plan Was A Disappointment

Last week, when details of Japan’s “massive” JPY28 trillion stimulus plan emerged, we pointed out the “minor” snag that assured the plan would be a disappointment: only about JPY7 trillion of this amount would be in the form of new spending. Overnight, Japan finally revealed the full plan, and as expected it was met with significant disappointment by the market, which sent the Yen soaring to new multi-week highs, with the USDJPY tumbling under 102 which, together with a very poorly received 10Y auction, sent Japanese bond yields surging.

So what was in the plan? 

First the good news: as the FT writes, “Shinzo Abe has put Japan at the forefront of a global shift away from austerity and back towards looser fiscal policy as he launched a new ¥4.6tn ($45bn) stimulus to boost a struggling Japanese economy.” 

However, as previewed here last week, while Abe proclaimed a total package of ¥28.1tn, the actual new government spending is ¥6.2tn, of which ¥4.6tn — 0.9 per cent of gross domestic product — will fall in the current fiscal year. The package includes ¥2.5tn in welfare spending, ¥1.7tn for infrastructure, ¥0.6tn for small and medium-sized businesses hit by “uncertainty due to Brexit”, and ¥2.7tn for reconstruction after an earthquake on the southern island of Kyushu earlier this year.

The Japan Ministry of Finance released the following breakdown of key stimulus component:

Wait till next time, BOJ says

The Bank of Japan’s small expansion of monetary easing Friday could be the warmup for a bold offensive next time around in concert with fiscal policy moves.

The central bank’s statement on the “enhancement of monetary easing” drew attention not so much for its immediate impact, as for the pledge to “conduct a comprehensive assessment” of economic and price developments when the policy board next meets. This is aimed at hitting the target of 2% price growth “at the earliest possible time” — phrasing that inevitably calls to mind the possibility of further easing. BOJ Gov. Haruhiko Kuroda, for his part, did not rule out that interpretation when speaking to media after the meeting.

 The governor emphasized the importance of a healthy mix of fiscal and monetary measures. Most likely, any expanded easing will complement whatever large-scale stimulus the government has in store.

On its own, bold fiscal spending funded by Japanese government bonds would put upward pressure on long-term interest rates by sucking up capital from the private sector. Adding stronger monetary easing to the mix combats that pressure, maximizing the impact of stimulus. Such a combination also would likely be easier for the BOJ to swallow than bolstering the economy with monetary policy alone.

Getting cozy

The central bank’s policy board will next meet for two days starting Sept. 20 — good timing in relation to fiscal policy mileposts. Prime Minister Shinzo Abe’s government will unveil its stimulus package Tuesday. By the end of August, government ministries and agencies will have put in funding requests for the fiscal 2017 budget. Another supplementary budget for this fiscal year will be brought before the Diet when an extraordinary session convenes in September.