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Fri, 26th May 2017

Anirudh Sethi Report

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Archives of “inflation” Tag

Emerging Markets :An Update

  • China’s government approved the creation of a bond link between Hong Kong and the mainland.
  • S&P upgraded Indonesia one notch to investment grade BBB- with stable.
  • Fitch revised the outlook on Vietnam’s BB- rating from stable to positive.
  • Egypt will announce a package of social spending soon.
  • Moody’s changed the outlook on Poland’s A2 rating from negative to stable.
  • Brazil press reported that meat-packing company JBS has submitted compromising tape recordings to the Supreme Court.
  • Chile central bank surprised markets with a 25 bp cut but signaled a move to a neutral bias.

In the EM equity space as measured by MSCI, Hungary (+2.6%), Indonesia (+2.0%), and Peru (+1.4%) have outperformed this week, while Brazil (-11.1%), Poland (-1.8%), and Egypt (-1.7%) have underperformed.  To put this in better context, MSCI EM fell -0.3% this week while MSCI DM was flat.

In the EM local currency bond space, India (10-year yield -11 bp), Korea (-7 bp), and Peru (-4 bp) have outperformed this week, while Brazil (10-year yield +155 bp), Argentina (+28 bp), and Turkey (+22 bp) have underperformed.  To put this in better context, the 10-year UST yield fell 8 bp to 2.25%.

In the EM FX space, SGD (+1.3% vs. USD), ZAR (+1.0% vs. USD), and THB (+0.9% vs. USD) have outperformed this week, while BRL (-4.6% vs. USD), ARS (-3.1% vs. USD), and INR (-0.5% vs. USD) have underperformed.

China Reserves Jump Most In 3 Years to $ 3.03 Trillion

In all the drama surrounding the French elections, few noticed the PBOC’s announcement that China’s FX reserves rose for the third straight month in April, increasing by $20.45 billion to $3.03 trillion, more than the $11 billion expected and the single biggest monthly increase in three years going back to April 2014, on the back of a weaker dollar and increasingly more draconian capital controls on outflows.

Cited by the WSJ, some economists attributed April’s increase to a dollar that continued to decline in the past month especially after Trump said the U.S. currency “is getting too strong.” The value of other currencies in China’s reserve basket, including the euro, the British pound and Japan’s yen, similarly played a significant role in the rise, said Yan Ling, an economist with China Merchants Securities.

Besides USD softness (USD has weakened against the CFETS basket by over 2% year-to-date through April) and perhaps stronger RMB sentiment, the capital flow management measures introduced over the last several months have also contributed to the slowdown in outflows, Goldman speculated in a Sunday note. That could reverse, as there may be incremental relaxation of the capital account as the flow situation has improved and an overly tight capital account could hinder legitimate international trade and the authorities’ long-term RMB internationalization goals.

Lohias eye Tata Chem Haldia unit

Indorama Corporation, owned by Calcutta-born NRI billionaire Sri Prakash Lohia, has evinced interest in Tata Chemicals’ struggling fertiliser plant in Haldia.

The unit, closed for maintenance since February 21, makes complex ammonia and phosphate-based fertilisers such as DAP, NPK and SSP, similar to those manufactured by Indorama in Nigeria.

The port-based plant has been operating under considerable strain because of low productivity and an unfavourable cost structure, compared with imported fertilisers, and the Tatas are believed to be open to the idea of selling off the unit.

Last fiscal, Tata Chemicals transferred its urea business, which had a manufacturing facility at Babrala in Uttar Pradesh, to Yara India for Rs 2,670 crore on a slump sale basis.

Emerging Markets :An Update

  • Malaysia’s central bank said it will allow investors to fully hedge their currency exposure.
  • Egypt declared a 3-month state of emergency after two deadly church attacks.
  • South Africa’s parliamentary no confidence vote has been delayed
  • Argentina central bank surprised markets with a 150 bp hike to 26.25%.
  • Brazil central bank accelerated the easing cycle with a 100 bp cut in the Selic rate.
In the EM equity space as measured by MSCI, South Africa (+3.1%), Turkey (+2.5%), and the Philippines (+0.9%) have outperformed this week, while Russia (-3.9%), Peru (-3.4%), and Brazil (-2.6%) have underperformed.  To put this in better context, MSCI EM fell -0.3% this week while MSCI DM fell -0.7%.
 
In the EM local currency bond space, South Africa (10-year yield -18 bp), Poland (-8 bp), and Indonesia (-8 bp) have outperformed this week, while Brazil (10-year yield +11 bp), Peru (+9 bp), and Colombia (+9 bp) have underperformed.  To put this in better context, the 10-year UST yield fell 15 bp to 2.24%.
 
In the EM FX space, ZAR (+2.5% vs. USD), RUB (+1.9% vs. USD), and ARS (+1.2% vs. USD) have outperformed this week, while HUF (-0.9% vs. EUR), KRW (-0.5% vs. USD), and PLN (-0.5% vs. EUR) have underperformed.

Raghuram Rajan Warns “The Fundamental Problems Of The Financial Crisis Are Still With Us”

Raghuram Rajan, Professor of Finance at the University of Chicago and former governor of the Reserve Bank of India, warns of more turmoil ahead if the developed world fails to adapt to the fundamental forces of global change.

 

It is a pivotal moment on the eve of the financial crisis. In the late summer of 2005, the world’s most influential central bankers and economists gather in Jackson Hole at the foot of the Rocky Mountains. The atmosphere is carefree. Financial markets have nicely recovered from the bust of the dotcom bubble and the global economy is humming. Under the topic »Lessons for the Future» the presentations celebrate the era of Federal Reserve chairman Alan Greenspan, who has announced to resign in a few months. Since 1987 at the helm of the world’s most powerful central bank, he presided over a period of continuous growth and was one of the leading forces of deregulation in the financial sector.

 But when Raghuram Rajan steps to the podium the mood suddenly turns icy. At that time the chief economist at the International Monetary Fund, the native Indian warns that unpredictable risks are building up in the financial system and that the banks are not prepared for an emergency. His dry analysis draws spiteful remarks. »I exaggerate only a bit when I say I felt like an early Christian who had wandered into a convention of half-starved lions», he recollects.

 Soon, however, his prediction turns out to be correct. Less than one year later, the US housing boom runs out of steam which triggers the worst recession since the Great Depression. Today, Mr. Rajan who governed the Reserve Bank of India until last fall and now teaches finance at the University of Chicago, is reputed as one of the most distinguished economic thinkers on the planet. So what prompted him to voice his concerns at that time in Jackson Hole? Where does he think the world stands in the spring of 2017? And what is his outlook for the coming years?

Zimbabwe Central Bank To Accept Cows, TVs, Fridges As Collateral

 

Long before China Huishan Dairy Holdings, China’s largest daily farmer, became known as the latest Chinese corporate fraud whose stock crashed 90% in seconds after a Muddy Waters report brought attention to its questionable shadow banking funding, exposing the company as a hollow sham and leading to the prompt departure of four of its directors who hope (in vain) to escape prison time, the company was best known for being the first ever company to do cow-collateralized stock buybacks.

For readers whose recollection on this particular topic, fascinating as it may be, is vague, this is what we wrote last May: 

“China Huishan Dairy is selling about a quarter of its [cow] herd, about 50,000 animals, to Guangdong Yuexin Finance Lease for 1 billion yuan ($152 million) and then renting them back. The reason: to obtain urgently needed cash (let some other sucker CEO worry about paying the coupon on the lease), so it can repurchase glorious amounts of its stock.

 And yes, cows were used as collateral. “It’s not very common to use cows as collateral,” said Robin Yuen, an analyst at RHB OSK Securities Hong Kong Ltd. “The value of a cow would fluctuate depending on milk prices and other factors, so it’s a risky asset for lenders. It would be hard to do forced selling – there’s no liquid market for a large number of cows.”

Fed’s Yellen: US economy is ‘pretty healthy’

Yellen comments:

  • A better look at inflation is around 1.75%
  • Housing is ‘a little bit healthier than it’s been’
  • Consumer is helping economy
  • Looking forward, I think economy is going to continue to grow at a moderate pace
  • Financial system is essential for the economy
  • Distorted rewards in financial system contributed to crisis
  • “Appropriate stance of policy now is something close to neutral”
  • We think it’s appropriate to raise rates to a more-neutral level if economy continues to perform
  • Our assessment of neutral is “really not that high”
  • Although we’re close, we’re still below 2% in inflation in my assessment
  • Since the 1980s, the general expectation is the public sees it at 2% despite temporary deviations from that
  • We ‘equally’ don’t want inflation to linger below 2%

Words and actions about the equality of that inflation target don’t match.

More:

  • The fact you could create so many jobs in 2%-growth economy suggests low productivity
  • Economic potential without absorbing labor market slack is probably less than 2%
  • Output per worker has been very slow in recent years, my guess is it will pickup

Citi: Central Banks “Took Over” Markets In 2009; In December The “Unwind” Begins

Citigroup’s crack trio of credit analysts, Matt King, Stephen Antczak, and Hans Lorenzen, best known for their relentless, Austrian, at times “Zero Hedge-esque” attacks on the Fed, and persistent accusations central banks distort markets, all summarized best in the following Citi chart…

… have come out of hibernation, to dicuss what comes next for various asset classes in the context of the upcoming paradigm shift in central bank posture.

In a note released by the group’s credit team on March 27, Lorenzen writes that credit’s “infatuation with equities is coming to an end.”

 What do credit traders look at when they mark their books? Well, these days it is fair to say that they have more than one eye on the equity market.

Understandable: after all, as the FOMC Minutes revealed last week, even the Fed now openly admits its policy is directly in response to stock prices.

As the credit economist points out, “statistically, over the last couple of years both markets have been influencing (“Granger causing”) each other. But considering the relative size, depth and liquidity of (not to mention the resources dedicated to) the equity market, we’d argue that more often than not, the asset class taking the passenger seat is credit. Yet the relationship was not always so cosy.  Over the long run, the correlation in recent years is actually unusual. In the two decades before the Great Financial Crisis, three-month correlations between US credit returns and the S&P 500 returns tended to oscillate sharply and only barely managed to stay positive over the long run (Figure 3).”

Comments from China meetings coming out from Ross/Tillerson/Mnuchin

No joint statement released from the White House

Comments from Tillerson”
  • Trump/Xi had frank,, candid open talks
  • Trump raised serious concerns about the impact of China’s industrial, cyber, agricultural policies on US jobs
  • Agreed to Increase cooperation to convince North Korea to curb nuclear program
  • Trump/Xi Shared view that North Korea nuclear advancement has reached serious stage
  • noted importance of adherence to international norms in south China in East China Sea’s
  • agreed to new format for US China talks
  • Xi invited Trump for a state visit at a future date
  • Understood the US rresponse  to Syria chemical attacks because of the deaths of children
Mnuchin comments:
  • Held first comprehensive economic dialogue with Chinese counterparts on Friday
  • The Treasury Department will address currency issue in regular report
Commerce Secretary Ross
  • Most significant result of US China talks was hundred day plan
  • given range of issues between US and China the pace may be ambitious, but there is growing rapport between the two countries
  • Objective of  100 day plan is to increase US exports to China and reduce trade deficit
  • China expressed an interest in reducing net trade balance  because of the impact it is having on money supply and inflation

5 key takeaways from RBI’s first bi-monthly policy statement, 2017-18

The Reserve Bank of India, in its first monetary policy review of financial year 2017-18, kept the repurchase (repo) rate unchanged at 6.25%, citing upward risks to inflation and global uncertainty. 

The Monetary Policy Committee, however, raised the reverse repo rate by 0.25 basis points to 6%, and cut the marginal standing facility (MSF) rate to 6.5%.

“The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth,” said RBI in its policy statement.

“RBI hiked reverse repo rate by 25 bps to 6.00% thereby reducing the corridor between repo and reverse repo to 25 bps from the existing 50 bps. The essential aim seems to be ensuring a sharper focus on the keeping overnight rates (especially the overnight call money rate) aligned to the repo rate,” said Bekxy Kuriakose, Head – Fixed Income, Principal Mutual Fund.

Here are five key takeaways from the RBI’s policy statement:

Banks can invest in REITs

While reviewing the monetary policy, the central bank has proposed that banks be allowed to invest in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). This follows an earlier proposal by market regulator Securities and Exchange Board of India (Sebi).

The RBI proposed to allow banks to participate in Real Estate Investment Trusts (REIT) and Infrastructure Investment Trusts (InvITs) following a proposal by market regulator Securities and Exchange Board of India (SEBI). Banks would be allowed to invest in these instruments within the stipulated limit of 20 percent of net-owned funds.

“One of the highlights of today’s policy was the decision to allow banks to invest in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INVITs) within the 20% umbrella limit. It will allow banks to invest in an important asset class thereby providing much needed boost to this segment. Owing to better liquidity, the cost of capital for developers in the commercial segment will come down in the future,” said Surendra Hiranandani, chairman & managing director, House of Hiranandani in an emailed note.