Fri, 01st July 2016

Anirudh Sethi Report


Archives of “central banks” Tag

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.

Emerging Markets :An Update

The Brexit vote is a game-changer for EM.  While the direct impact on EM is limited, the damage to market sentiment is undeniable.  And to make matters worse, there will be a protracted period of uncertainty as the UK and the EU negotiate the divorce proceedings.  
We do not think individual country stories will matter much in this new investment climate, where risk assets are likely to remain under broad-based selling pressures.  We believe that Asia will outperform, while Latam and EMEA are likely to underperform.
Bank of Israel meets Monday and is expected to keep rates steady at 0.10%.  Deflation persists, with CPI at -0.8% y/y, well below the 1-3% target range.  Yet the central bank is hesitant to enact unconventional policies due to growing concerns about a housing bubble.  For now, the weaker shekel will be very welcome by policymakers in terms of stimulating the economy.
Mexico reports May trade data Monday, where a -$2.16 bln deficit is expected.  Banco de Mexico meets Thursday and is expected to hike rates 25 bp to 4.0%.  However, the market is split.  Of the 15 analysts polled by Bloomberg, 7 see no change, 5 see a 25 bp hike, and 3 see a 50 bp hike to 4.25%.  We see a close call, 50/50 odds between no hike and a 25 bp hike.  The weak peso is obviously a concern, but the inflation pass-through has been minimal.    
Brazil’s central bank releases its quarterly inflation report Tuesday.  This will be the first one prepared under Goldfajn, and will be very important in setting the tone for H2.  We think rising price pressures and a weaker BRL could prevent a cut at the next COPOM meeting July 20.  Brazil then reports June IGP-M wholesale inflation Wednesday, which is expected to accelerate to 12% y/y from 11.1% in May.  Brazil also reports consolidated budget data for May Wednesday, with a primary deficit of –BRL17.1 bln expected.  Brazil reports May IP Friday, which is expected at -8.1% y/y vs. -7.2% in April.  Brazil also reports June trade Friday.

Bank of Japan holds more than a third of all JGBs

The Bank of Japan’s holdings of Japanese government bonds have reached a third of the outstanding balance, resulting from large-scale purchases under its monetary easing program.

The central bank held 364 trillion yen ($3.49 trillion) in JGBs as of March 31, up 32.7% from a year earlier, according to preliminary flow of funds data for the January-March quarter released Friday. This accounts for a record 33.9% of all JGBs.

 The BOJ held 13% of the total as of March 31, 2013, before it engaged in aggressive monetary easing under Gov. Haruhiko Kuroda the following month.

The percentage appears to have grown further, considering BOJ figures show holdings have risen to 373 trillion yen as of June 10. The central bank will own half of all JGBs sometime in 2018, predicts Hidenori Suezawa of SMBC Nikko Securities.

The BOJ’s purchases and its negative interest rate policy have caused JGB yields to fall, pushing the yield on newly issued 10-year bonds into negative territory. And with concerns over the U.K. leaving the European Union spurring investors to seek the safety of JGBs, the yield on 40-year instruments touched a record-low 0.195% on Friday.

Central banks mull dollar liquidity injection as Brexit looms

Central banks in Japan, the U.S. and Europe are discussing an emergency supply of dollars to financial markets, seeking to ensure continued access to the currency even if the pound plunges in the event that the U.K. votes to exit the European Union.

The Bank of England provided 2.46 billion pounds ($3.46 billion) to banks Tuesday, while the European Central Bank will on Wednesday begin a new round of open market operations to supply euros. But the risk remains that European financial institutions with dollar-denominated debt will have a tougher time accessing the American currency.

 The BOE’s monetary policy summary released Thursday mentioned “deterioration in global risk sentiment” due partly to “increasing uncertainty” ahead of the June 23 referendum on whether the U.K. should leave the EU — a so-called Brexit. Making dollars more easily accessible would offer a safety net to contain this uncertainty if worse comes to worst.

The likely plan is to use dollar swap lines between the Federal Reserve and central banks in Japan, Canada and Europe, letting these institutions borrow dollars from the Fed to lend to financial institutions within their jurisdictions.

The Bank of Japan, which provides dollars to financial institutions once a week, will consider carrying out operations on consecutive days if it determines that supplies are running short. The ECB and BOE likely are also discussing specific measures with the Fed. Group of Seven leaders could issue a statement at the same time as an emergency dollar liquidity injection.

Bank of Japan Gov. Haruhiko Kuroda anxious as yen surges against dollar

The yen extended its gains against the dollar on Thursday afternoon, briefly touching 103.56, its highest level since August 2014. It had been in the 106 range on Wednesday.

Bank of Japan Gov. Haruhiko Kuroda, holding a press conference following the two-day policy meeting that ended earlier in the day, said the “strengthening yen, which does not reflect economic fundamentals, is undesirable.”

 He continued, “It is true that the yen strengthening in this style has a negative influence on the Japanese economy as well as on inflation.”

The central bank’s policymakers decided to keep their monetary easing program running at the current pace, increasing the country’s base money supply by an annual 80 trillion yen or so through massive asset purchases. The policy board also decided to keep a 0.1% charge on some reserves that financial institutions keep at the central bank.

The policy board kept its basic assessment unchanged, saying the economy “has continued its moderate recovery trend.” It noted, however, that exports and production remain sluggish due to slowdowns in emerging economies.

Warning from European Central Bank -Brexit risk to eurozone growth

Growth in the eurozone is at risk from Britain’s looming EU referendum and host of geopolitical risks, the European Central Bank has said.

With just a week before Britain heads to the polls in a potentially momentous vote, the ECB said the bloc’s growth outlook was at risk, after posting a robust 0.6 per cent expansion at the start of the year.

In its latest economic bulletin, the ECB said:

Downside risks continue to relate to developments in the global economy, to the upcoming British referendum on EU membership and to other geopolitical risks.

Other threats to the global economy include a normalisation of interest rates in the US, China’s protracted economic slowdown and a low oil-price environment.

The ECB’s comments on the referendum come as a host of global central banks have all weighed in to raise concerns about Britain’s place in the EU.

The Fed, Bank of Japan and Swiss national bank have warned of the impact of a Brexit in the last 24 hours.

ECB to cut rates if Fed holds steady in 2016 – Standard & Poor’s

The European Central Bank could cut interest rates further into negative territory this year as it struggles to meet its inflation target, Standard & Poor’s has said.

Noting comments from ECB president Mario Draghi that the bank stood ready to use “all the instruments available within its mandate” , S&P said the eurozone’s deposit rate could fall further if the Federal Reserve decides to hold pat on its second rate rise since the financial crisis this year.

Diminishing expectations a summer rate rise from the Fed has led to an appreciation in the euro, dampening nascent inflationary pressures in the 19-country bloc and providing another headache for European policymakers. The OECD has also chimed in, urging the ECB to cut rates if prices continued to flail.

Markets are now pricing in a 50 per cent probability of a 25 basis point rise in the Fed Funds rate by the end of 2016.

The ECB cut its deposit rate to a record low of -0.4 per cent earlier this year, in a bid to encourage commercial banks to lend by penalising them for holding their reserves at the central bank.

But record negative interest rates in the eurozone have done nothing to remedy fundamental imbalances in interbank lending across the 19-country bloc, found the rating agency.

European Central Bank overshoots QE target in May

The ECB said it hoovered up €85.2bn worth of debt last month (that’s combination of government debt, covered bonds and asset-backed securities). That’s quite a lot higher than the notional €80bn target the ECB has set itself since March this year, when it boosted its QE programme from €60bn a month.

Of the purchases, €79.67bn was in the form government debt, with €5.56bn in covered bonds.

The bumper May purchases also put paid to concerns that the ECB could already be running out of eligible bonds to buy under its stimulus programme. At June’s policy meeting, president Mario Draghi said there was enough flexibility within the scheme to ensure the central bank hits its €80bn target every month. (He also reiterated that the central bank is “willing, able and ready “ to ramp up its stimulus measures in future, if needed.)

As of this week, the monthly purchases will be joined by corporate bonds for the first time.

If you want to know more about the nitty gritty of the asset purchase programme, the ECB has released this erm…movie. No, really.

Emerging Markets :An Update

EM ended the week on a firm note after the US jobs shocker.  While we view the weak reading as a fluke, shifting market perceptions of Fed tightening risk should keep EM bid near-term.  However, we think the July FOMC meeting is still very much alive.  That and the upcoming Brexit vote are potential pitfalls for EM in the coming weeks.

Meanwhile, oil prices shrugged off disappointment with OPEC inaction last week, with WTI oil remaining near $50 to close out the week.  The central banks of India, Poland, Brazil, Korea, Peru, and Russia all meet this week.  All are expected to keep rates steady, but we note risks of a dovish surprise from Russia.  China data deluge for May begins this week with foreign reserves, trade, CPI, and PPI. 
Czech Republic reports April retail sales Monday, which are expected to rise 6.4% y/y vs. 5.0% in March.  It then reports April trade (CZK18.9 bln expected), construction output, and IP (4% y/y expected) Tuesday.  May CPI will be reported Thursday, which is expected to rise 0.4% y/y vs. 0.6% in April.  Deflation risks remain alive, even though the real sector is fairly robust.  Next central bank meeting is June 30, no changes expected.
Taiwan reports May CPI Tuesday, which is expected to rise 1.6% y/y vs. 1.9% in April.  It also reports May trade that same day, with exports seen at -10% y/y and imports at -11% y/y.  Low inflation and a weak economy should keep the central bank on its easing path.  The next policy meeting is June 22, and another 12.5 bp cut to 1.375% seems likely.