Sat, 28th May 2016

Anirudh Sethi Report


Archives of “central banks” Tag

Week ahead -US data deluge, ECB, Opec

Investors: Start your engines.

Next week is going to be jam-packed with key economic reports and closely-watched meetings that may send ripples through global financial markets.

Data dump

US Federal Reserve policymakers have made it clear that a summer rate rise is a definite possibility, something that was confirmed by commentary on Friday from Janet Yellen, who said a rate rise would likely be sensible within “coming months”. However, central bankers have also cautioned that the decision would depend on incoming economic data.

The flood of economic reports due next week should provide plenty of fodder. Chief among the releases will be the monthly jobs report from the Labor Department on Friday that is forecast to show the economy added 160,000 jobs in May, the same pace as the month prior. However, several Wall Street economists cautioned that a strike by Verizon Communications workers may have muddied the numbers.

The US economic calendar also includes:

  • Consumer spending and income (Tuesday)
  • The personal consumption expenditures price index, the Fed’s preferred inflation gauge (Tuesday)
  • S&P/Case-Shiller home-price report (Tuesday)
  • Institute for Supply Management manufacturing purchasing managers index (Wednesday)
  • Auto sales (Wednesday)
  • Trade balance (Friday)

Japan’s huge debt pile – Bill Gross says there’s only 1 way out

Here is Bill Gross on Japanese debt …. the full article is at Bloomberg 

  • I think at some point, Japan will basically buy up all its debt and the central bank will forgive the treasury and try to move forward with that. I see no other way out for Japan.
He goes on:
  • “Ultimately, they could say … You don’t have to pay us back. Or we’ll extend your debt to 50 years with a zero percent coupon and at that point we’ll essentially eliminate the entire obligation.’ “
  • Such a move would have dramatic and damaging consequences for Japan’s currency, savings rate and private sector
And, he isn’t finished:
  • “Japan’s a pretty good picture for the rest of the world, maybe five or 10 years ahead. I have a sense that that’s the route central banks will pursue”
Check out the link above from more from the G-man.


Emerging Markets -An Update

EM had another rocky week, but managed to end on a slightly firmer note Friday.  Market repricing of Fed tightening risk was the big driver last week, and that could carry over into this week.  There are several Fed speakers in the days ahead, capped off with Fed chief Yellen on Friday. 

Several EM central banks meet this week, including Israel, Turkey, Hungary, and Colombia.  There is some risk of a dovish surprise from Turkey, while Hungary is expected to continue easing.  Colombia is an outlier, with high inflation seen leading to another 25 bp hike. 
Singapore reports April CPI Monday, which is expected at -0.7% y/y vs. -1.0% in March.  It then reports April IP Thursday, which is expected at -0.3% y/y vs. -0.5% in March.  Deflation risks may be easing, but the economy continues to slow.  If weakness persists over the summer, then another easing move at the October MAS policy meeting is possible.
Taiwan reports April industrial output Monday, which is expected at -1.8% y/y vs. -3.6% in March.  Last week, Taiwan reported April export orders at -11.1% y/y, which suggests little relief ahead for IP and exports.  The growth outlook remains weak, and so the central bank is likely to continue cutting rates at its quarterly policy meeting in June.
Israeli central bank meets Monday and is expected to keep rates steady at 0.10%.  Deflation worsened to -0.9% y/y in April, while Q1 GDP growth was much weaker than expected at 0.8% annualized.  As such, there is growing risk that the Bank of Israel will have to take further measures in H2 to boost the economy.  For now, officials will be happy with recent shekel weakness.  The central bank had been intervening to prevent strength in recent months, but the shekel has underperformed recently due to rising political risks.

Breaking : BOJ seen preparing for exit from easing with reserves

The Bank of Japan likely set aside funds for the first time to prepare for losses on its huge holdings of Japanese government bonds should the central bank end its monetary easing policy in the future.

The bank is thought to have reserved about 450 billion yen ($4.07 billion) for the year ended in March. The amount will become known when the BOJ releases financial statements as early as next week.

 The BOJ created a framework last fiscal year that permits it to set aside part of the interest income from its JGB holdings, which have ballooned through the bank’s massive monetary easing program. Interest income likely grew about 30% from the prior year to around 1.3 trillion yen in fiscal 2015.

Though BOJ Gov. Haruhiko Kuroda has indicated that the bank could expand easing if it faces difficulty achieving its inflation target, the creation of the reserves is a move to prepare for an exit from monetary easing.

The central bank’s JGB holdings totaled 349 trillion yen as of March 31, up about 180% in three years. Long-term interest rates, currently in negative territory, will rise and bond prices will fall should the BOJ end its monetary easing once it is sure that Japan is finally breaking free of deflation. The bank estimates that a 1 percentage-point rise in long-term rates lowers the value of its JGB holdings by 21 trillion yen.

Emerging Markets -An Update

EM ended last week on a soft note, and that weakness seems likely to carry over into this week.  Dollar sentiment turned more positive after firm retail sales data on Friday, though US rates markets have yet to reflect any increase in Fed tightening expectations.  Over the weekend, China reported weaker than expected April IP, retail sales, and fixed asset investment.  This continues a string of weak data for the month, and will undercut notions that the world’s second largest economy is stabilizing.  
Country-specific risks remain in play.  Brazil markets are showing some “buy the rumor, sell the fact” price action after the Senate voted to continue the impeachment process.  Weak economic data suggest that incoming Finance Minister Meirelles will inherit a terrible mess.  Poland avoided a downgrade by Moody’s over the weekend, but the outlook was moved to negative and points to a likely downgrade ahead.  Turkey and South Africa continue to face downgrade risk as well.
Colombia reports March retail sales and IP Monday.  The former is expected to rise 3.4% y/y and the latter 6.6% y/y.  Central bank minutes showed a unanimous vote to hike rates in April.  A majority voted for the larger than expected 50 bp, while a minority favored a smaller 25 bp hike.  Next policy meeting is May 27 and further tightening then is possible if peso weakness continues.
Singapore reports April trade Tuesday.  NODX are expected at -7.4% y/y vs. -15.6% in March.  Data have been coming in soft in recent months, justifying the MAS decision to loosen policy at its April policy meeting.  Next meeting is in October.  While we think the MAS has a dovish stance, it’s too early to say if it will ease again then.

Raghuram Rajan warns on stimulus overuse

Central banks and governments of rich countries are running out of ammunition for stimulating their economies, says Raghuram Rajan, the head of the Indian central bank — but they can never admit as much.

Speaking to the Financial Times at the University of Chicago Booth School of Business in London, Mr Rajan criticised efforts to use fiscal and monetary policy and infrastructure programmes to boost growth rates in advanced economies

Long a critic of low interest rates in rich countries that can drive hot-money flows to poorer parts of the world, the governor of the Reserve Bank of India suggested that loose policies were also weakening the underlying performance of advanced economies.

Although Mr Rajan said there were limits on stimulus, he said central banks “cannot claim to be out of ammunition because immediately that would create the wrong kind of expectations, so there’s always something up their sleeves”.

Mr Rajan said he was a supporter of stimulus policies to “balance things out” over short periods when households or companies were proving excessively cautious with their spending. But eight years after the financial crisis, we “have to ask ourselves is that the real problem?”.

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.