Sun, 01st May 2016

Anirudh Sethi Report


Archives of “central banks” Tag

Weak economy poses test for BOJ’s bullish Gov. Haruhiko Kuroda

Though Bank of Japan Gov. Haruhiko Kuroda played up the positive at Thursday’s news conference, economic indicators point to a foundering economy that calls his strategy and his unshakable confidence into question.

The average estimate of 15 private-sector research institutes puts annualized gross domestic product growth for the January-March quarter at just 0.35%. Excluding a 1.2 percentage-point boost from the extra day caused by the leap year would leave growth in negative territory for a second straight quarter, with GDP having shrunk 1.1% in the October-December period. 

“Even though growth looks positive on the surface, the economy’s actually weak,” Yoshiki Shinke of Dai-ichi Life Research Institute said.

All eyes are on preliminary GDP data for the quarter, to be released by the Cabinet Office May 18. The data will be a key factor in the government’s decision on whether to raise the consumption tax to 10% in April 2017 as planned.

Kuroda, speaking after the bank’s policy board meeting, asserted that the BOJ can engineer 2% inflation, arguing that growing incomes continue to promote consumer spending. But price and consumption data tell a different story.

The bad smell hovering over the global economy

All is calm. All is still. Share prices are going up. Oil prices are rising. China has stabilised. The eurozone is over the worst. After a panicky start to 2016, investors have decided that things aren’t so bad after all.

Put your ear to the ground though, and it is possible to hear the blades whirring. Far away, preparations are being made for helicopter drops of money onto the global economy. With due honour to one of Humphrey Bogart’s many great lines from Casablanca: “Maybe not today, maybe not tomorrow but soon.”

But isn’t it true that action by Beijing has boosted activity in China, helping to push oil prices back above $40 a barrel? Has Mario Draghi not announced a fresh stimulus package from the European Central Bank designed to remove the threat of deflation? Are hundreds of thousands of jobs not being created in the US each month?

In each case, the answer is yes. China’s economy appears to have bottomed out. Fears of a $20 oil price have receded. Prices have stopped falling in the eurozone. Employment growth has continued in the US. The International Monetary Fund is forecasting growth in the global economy of just over 3% this year – nothing spectacular, but not a disaster either.

Don’t be fooled. China’s growth is the result of a surge in investment and the strongest credit growth in almost two years. There has been a return to a model that burdened the country with excess manufacturing capacity, a property bubble and a rising number of non-performing loans. The economy has been stabilised, but at a cost.

Emerging Markets -An Update

  • Bank Indonesia signaled it may pause its easing cycle
  • Vietnam undertook a massive cabinet shuffle
  • MSCI is reviewing Nigeria’s standing in its equity indices due to the impact of ongoing FX controls
  • Russia’s central bank tilted a bit more dovish
  • South Africa’s parliament voted down President Zuma’s impeachment proposal by a vote of 233-143
  • The impeachment process in Brazil moved forward another step
  • Brazil’s Prosecutor General submitted a report to the Supreme Court saying that Lula’s appointment to the cabinet should not be allowed
In the EM equity space, Russia (+0.9%), Malaysia (+0.5%), and Hungary (+0.4%) have outperformed this week, while Brazil (-4.1%), Poland (-3.0%), and India (-2.4%) have underperformed.  To put this in better context, MSCI EM fell -1.3% this week while MSCI DM fell -0.8%.
In the EM local currency bond space, the Philippines (10-year yield -9 bp), Mexico (-5 bp), and Ukraine (-4 bp) have outperformed this week, while Peru (10-year yield +21 bp), Brazil (+18 bp), and Russia (+11 bp) have underperformed.  To put this in better context, the 10-year UST yield fell -4 bp this week to 1.73%.
In the EM FX space, ARS (+2.3% vs. USD), RUB (+0.8% vs. USD), and HUF (+0.3% vs. EUR) have outperformed this week, while BRL (-2.7% vs. USD), MXN (-2.2% vs. USD), and ZAR (-2.1% vs. USD) have underperformed.

Bank Indonesia signaled it may pause its easing cycle.  Senior Deputy Governor Adityaswara said “We want to see the impact on growth and inflation before we do the next cut.”  Elsewhere, Governor Martowardojo said that the central bank must be careful in considering further rate cuts.  The bank has cut its policy rate 25 bp at every meeting this year so far.  The next policy meeting is April 21, and it seems likely to remain on hold then at 6.75%.

Negative rates beginning to bite BOJ

 The Bank of Japan’s negative interest rate policy has started disrupting another of the central bank’s key policies — its unprecedented monetary easing program — as commercial paper with yields dipping deep into negative territory surface at the bank’s auctions.

     The BOJ came to a Monday commercial paper auction with 600 billion yen ($5.3 billion) in spending money. A total of 644.9 billion yen of commercial paper was on offer, but the central bank bought just 530.4 billion yen worth. 

     In normal auctions for outright purchases of commercial paper, the BOJ would exhaust its budget if the amount of paper exceeded its initial spending target. It would simply keep buying, starting with the best offers, until it drained its funds. This did not occur on Monday because the central bank set a minimum yield for the first time.

     Amid the negative interest rate environment, more than 100 billion yen in commercial paper carrying negative rates of 0.5% or more were believed to have been put up for auction. But the BOJ set its own minimum yield threshold of minus 0.647%, fearing a possible growth in losses and a distortion in interest rate formation.

Fed’s Bullard: considered dropping out of dot plot

James Bullard, one of the Federal Reserve governors setting interest rates this year, has considered dropping out of the central bank’s so-called ‘dot plot’ of interest-rate projections because they risk confusing investors.

Made up of each Fed’s voters’s predictions for where the bank’s key interest rate will end the next three years, the dot plot is the most concrete forecast policymakers provide to investors on the path for policy and is updated each quarter.

However, the sometimes sharp changes in the projections from meeting to meeting can cause significant swings in financial markets. In December, policymakers forecast they would raise rates four times in 2016, but last week they cut that prediction to two.

“I’m getting increasingly concerned about the forward guidance being given through the dot plot,” Mr Bullard, the head of the St.Louis Fed, told Bloomberg on Wednesday. “I’ve even thought about dropping out unilaterally from the whole exercise.”

Central banks prove Albert Einstein’s theory

Albert Einstein is said to have defined insanity as doing the same thing over and over again and expecting different results. By failing to change their way of thinking since the global financial crisis, the world’s main central banks are proving Einstein right.

Many in the markets worry that central banks are running out of ammunition to boost global growth and generate inflation. They are not. The Bank of Japan’s adoption of negative interest rates, the European Central Bank’s extension of its quantitative easing (QE) programme and the Federal Reserve’s decision to slow the normalisation of US interest rates show that policymakers can still draw on plenty of firepower.

So it is not that central banks are not doing enough. It is that their policies are misguided and are hampering global rebalancing. In particular, investors should be worried that policymakers have failed to learn three main lessons from the subpar performance of the global economy since the 2008-09 crisis.

First, if an economy is drowning in debt, the solution is not to pile on even more debt. That is why the ECB’s offer, under the terms of its new targeted longer term refinancing operations, to pay eurozone banks to increase their lending is badly judged. The ECB is right to do QE, but at the same time it should use its new powers as the supervisor of eurozone banks to force a swifter write-off of bad debts. Almost 20 per cent of Italian bank loans are non-performing. Until now, the ECB has counted on QE to work by weakening the euro. Its strategy instead should be to use QE to buy time to cleanse bank balance sheets.

The Federal Reserve’s new dot plot: charts ,September now pencilled in for next US rate rise

The Federal Reserve now expects to increase interest rates twice this year, down from a December projection of four times, according to the median forecast of members on the central bank’s policy-setting board.

The chart below shows the more gradual path of rates expected by FOMC participants:


Pencil in September. Interest-rate futures markets suggest investors now expect the Federal Reserve to next raise interest rates in September, not June, as had been the projection before the central bank released its latest assessment of the economy on Wednesday.


“We’re One Hawkish Fed Statement Away” From A “Sharp Re-Pricing,” Deutsche Bank Warns

On Sunday evening we brought you the latest from Goldman’s chief equity strategist David Kostin who explained that sharp swings in crude prices have created pronounced (and in fact historic) momentum swings, catching those who had piled into “popular investment themes” to be caught flat-footed. Here’s what Kostin said:

The correlation between major macro trends has caught many popular investment themes in the momentum spin cycle. In 2015 and the first weeks of this year, lower oil prices were accompanied by lower Treasury yields and downward revisions to US growth expectations, boosting the performance of popular growth stocks and defensive equities while weighing on banks. At the same time, the US dollar, which carries a strong negative correlation with oil, strengthened by nearly 15% and presented another headwind to the US economy. The combination of growth concerns and low oil prices widened credit spreads to recessionary levels and benefitted the performance of stocks with strong balance sheets. All of these trends have reversed sharply in recent weeks.

But as we wrote, Kostin is far from bullish. Instead, he says the market may be underestimating (or else just plain ignoring) the “largest current macro risk”: a hawkish Fed and consequently, a stronger USD. The result, another sharp reversal as stocks with strong balance sheets are once again in vogue versus momo plays, energy, and anything with nosebleed leverage.

Well now Deutsche Bank is falling in line, suggesting that European equity investors are missing the very same risks (i.e. a hawkish Fed, resultant strong USD, and weaker commodities).

“Our European credit strategists estimate that the ECB could buy €5bn – €10bn a month in IG corporate bonds starting at the end of Q2, out of an eligible universe of €400bn – €500bn,” the bank’s European equity strategists write, in note out Monday. “If ECB easing in combination with stronger oil prices pushes up Euro-area inflation expectations, while increased asset purchases reduce peripheral bond spreads, GDP-weighted Euro-area real bond yields have further downside, which should boost European P/Es.”

But, you should be cautious. Why? Because “we are just one hawkish Fed statement away,” from a series of events that will end in investors returning to their “clearly depressed” positioning in February. To wit:

Emerging Market -An Update

EM enjoyed an extended rally last week, and it should carry over to the early part of the week. The Wednesday FOMC meeting poses a risk to EM, especially if markets continue to price in a more hawkish Fed. The dot plots and press conference will be very important. BOE and the Norges Bank also meet this week, with the latter expected to deliver a 25 bp rate cut to 0.5%. Firm commodity prices are helping sentiment, with WTI making new highs for 2016 and approaching the $40 area. While weaker than expected China data over the weekend could hurt EM sentiment, this may be offset by the strongest yuan fixes this year by the PBOC.
Besides the global backdrop, specific country risk remains important. Brazil continues to ride a wave of impeachment optimism, but we warn that this bullishness is likely overdone. The South African Reserve Bank meets amidst deteriorating fundamentals, while Turkey was able to wring a favorable deal out of the EU regarding the refugee crisis. Elsewhere, Poland came under criticism from the Council of Europe due to the government’s Constitutional Court overhaul.
India reports February WPI and CPI data Monday. The former is expected at -0.2% y/y and the latter at 5.52% y/y. Price pressures are starting to pick up, and should keep the RBI cautious going forward. The next policy meeting is April 5, and no change in rates is expected then.
Czech Republic reports January retail sales Monday, which are expected to rise 6.0% y/y vs. 8.7% in December. It reports January construction and industrial output (1% y/y consensus) Tuesday. The real sector remains robust, but continued deflation risks remain a concern for the central bank. Although the bank has started to discuss negative interest rates, we do not think current conditions warrant such a response yet.
Brazil reports January GDP proxy Monday and is expected at -7.1% y/y vs. -6.5% in December. Brazil then releases the second preview for March IGP-M wholesale inflation Friday. Most inflation measures remain elevated, and yet the central bank has been able to keep rates steady at 14.25% without the long end of the Brazilian curve selling off. IPCA inflation came in lower than expected in February and eased to 10.4% y/y.

The Incredible Story Of How Hackers Stole $100 Million From The New York Fed

The story of the theft of $100 million from the Bangladesh central bank – by way of the New York Federal Reserve – is getting more fascinating by the day.

As we reported previously, on February 5, Bill Dudley’s New York Fed was allegedly “penetrated” when “hackers” (of supposed Chinese origin) stole $100 million from accounts belonging to the Bangladesh central bank. The money was then channeled to the Philippines where it was sold on the black market and funneled to “local casinos” (to quote AFP). After the casino laundering, it was sent back to the same black market FX broker who promptly moved it to “overseas accounts within days.”

That was the fund flow in a nutshell.

As we explained, the whole situation was quite embarrassing for the NY Fed, because what happened is that someone in the Philippines requested $100 million through SWIFT from Bangladesh’s FX reserves, and the Fed complied, without any alarm bells going off at the NY Fed’s middle or back office.

“Some 250 central banks, governments, and other institutions have foreign accounts at the New York Fed, which is near the centre of the global financial system,” Reuters notes. “The accounts hold mostly U.S. Treasuries and agency debt, and requests for funds arrive and are authenticated by a so-called SWIFT network that connects banks.”

Well, as it turns out, Bangladesh doesn’t agree that the Fed isn’t ultimately culpable. “We kept money with the Federal Reserve Bank and irregularities must be with the people who handle the funds there,” Finance Minister Abul Maal Abdul Muhith said on Wednesday. “It can’t be that they don’t have any responsibility,” he said, incredulous.

Actually, Muhith, the New York Fed under former Goldmanite Bill Dudley taking zero responsibility for enabling domestic and global crime is precisely what it excels at.