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Wed, 24th May 2017

Anirudh Sethi Report

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Archives of “interest rate” Tag

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?

Nigeria naira slides to 405 to dollar on black market

When it comes to Nigeria’s currency, mind the gap, again: the spread between the official and parallel market rates for the naira is widening once more.

During a more than two-week run, the naira strengthened to a six-month high of 390 per dollar on the black market – close to one of the multiple official exchange rates, but still far off the interbank rate of around 305 to the dollar.

However, the naira is weakening once more on the black market, slipping below 400 to the dollar, to 405 to the dollar on Monday, according to traders.

In the absence of adequate supplies of dollars in the official market, businesses and individuals have been forced to buy hard currency on the black market, stoking demand there and eventually weakening the naira to a record low of 520 in February. Analysts said the gap between the official rate of just over 300 to the dollar and the black market one indicated the scale of unmet demand for hard currency in Africa’s most populous nation.

Emerging Markets :An update

  • Reserve Bank of India surprised markets with the start of the tightening cycle.
  • The Czech National Bank (CNB) ended the EUR/CZK floor.
  • Israeli central bank said it won’t hike rates until Q2 2018.
  • Both S&P and Fitch cut South Africa’s rating one notch to sub-investment grade BB+.
  • Moody’s put South Africa’s Baa2 rating on review for a downgrade
  • S&P upgraded Argentina one notch to B with stable outlook.
  • Brazil’s government will water down its pension reform plan
  • Brazil’s central bank corrected some errors in its inflation report.

In the EM equity space as measured by MSCI, the Philippines (+3.8%), Chile (+3.5%), and Poland (+3.4%) have outperformed this week, while Korea (-0.7%), Turkey (-0.6%), and Peru (-0.5%) have underperformed.  To put this in better context, MSCI EM rose 0.3% this week while MSCI DM fell -0.5%. 

In the EM local currency bond space, Bulgaria (10-year yield -11 bp), Chile (-6 bp), and South Africa (-6 bp) have outperformed this week, while India (10-year yield +17 bp), Turkey (+12 bp), and Indonesia (+10 bp) have underperformed.  To put this in better context, the 10-year UST yield fell 6 bp to 2.33%. 
In the EM FX space, CZK (+1.7% vs. EUR), INR (+0.9% vs. USD), and EGP (+0.7% vs. USD) have outperformed this week, while ZAR (-3.0% vs. USD), TRY (-2.7% vs. USD), and RUB (-1.6% vs. USD) have underperformed.

Reserve Bank of India surprised markets with the start of the tightening cycle.  It hiked the reverse repo rate 25 bp to 6.0% but left the repo rate steady at 6.25%.  The decision was unanimous, and we expect further tightening as the year progresses.

Emerging Market :An Update

EM FX was mixed last week.  The rebound in oil helped some, such as COP, RUB, and MXN.  On the other hand, idiosyncratic political risks weighed on South Africa.   This week could pose a challenge to EM, with lots of Fed speakers, FOMC minutes, and US jobs data.

Thailand reports March CPI Monday, which is expected to rise 1.30% y/y vs. 1.44% in February.  If so, this would be moving closer to the bottom of the 1-4% target range.  BOT just left rates steady at 1.5% last week.  We expect inflation to pick up again, and so BOT should tilt more hawkish as the year progresses.  Next policy meeting is May 24, and we expect steady rates again.  

Indonesia reports March CPI Monday, which is expected to rise 3.80% y/y vs. 3.83% in February.   The target range is 3-5%, but Bank Indonesia has signaled that the easing cycle is over, and should lean more hawkish this year if inflation continues to rise.  Next policy meeting is April 20, we expect rates to be kept steady at 4.75%.
Turkey reports March CPI Monday, which is expected to rise 10.70% y/y vs. 10.13% in February.  Inflation is moving further above the 3-7% target range, and the central bank hiked the Late Liquidity Window lending rate 75 bp to 11.75% at its last policy meeting.  If price pressures continue to rise, the central bank may have to tighten again at its next policy meeting April 26.
Korea reports March CPI Tuesday, which is expected to rise 2.1% y/y vs. 1.9% in February.  The inflation target is 2%, and so BOK should tilt more hawkish if inflation continues to rise.  Next BOK meeting is April 13, and we expect rates to be kept steady at 1.25%.  Korea reports February current account data Wednesday.
Hungary reports February retail sales Tuesday, which are expected to rise 3.5% y/y vs. 3.8% in January.  It reports February IP Wednesday, which is expected to rise 3.0% y/y vs. 1.6% in January.  February trade will be reported Friday.  The economy remains robust, and yet the central bank just eased policy more than expected last week.  The cap on 3-month deposits was cut to HUF500 bln for end-Q2 from HUF750 bln for end-Q1.  

SNB leaves rates unchanged at March 2017 meeting

Swiss National Bank leaves rates unchanged at March 2017 monetary policy meeting

  • 3 month LIBOR lower target range -1.25%
  • 3 month LIBOR upper target range -0.25%
  • Sight deposit rate -0.75%

All as expected.

  • Will remain active in FX market as necessary
  • Swiss Franc significantly overvalued
  • Swiss forecasts is marked by considerable uncertainty from international risks
  • Raises 2017 CPI forecast to 0.3% vs 0.1% in Dec
  • 2018 CPI 0.4% vs 0.5% prior
  • 2019 CPI 1.1%
  • Maintains 2017 GDP at “roughly” 1.5%

Euro climbs to 3-week high against dollar on rate speculation

The euro climbed to its strongest level against the dollar since mid-February as the markets reassessed the odds of a December rate rise by the European Central Bank.

A day after mildly hawkish comments from European Central Bank president Mario Draghi helped send the single currency higher, the euro tacked on another 0.9 per cent to hit a three week high of $1.0673 following a report that the ECB had discussed whether rates could rise before it ends its bond buying programme.

However, two people familiar with the discussions denied there had been any meaningful debate over the issue. One person said some members are keen for the council to consider raising the deposit rate, now at minus 0.4 per cent, before it ends its quantitative easing programme.

Against the pound, the euro was up 1 per cent at €1.1393 – a level last seen in mid-January. The currency also firmed more than 1 per cent against the Japanese yen at 122.83.

Global economy walking a tight rope, Bill Gross warns

Bill Gross, the bond manager, on Thursday renewed his warning that high levels of debt across the world pose a rising risk of derailing the global economic expansion.

The portfolio manager at Janus Capital said that “our highly levered financial system is like a truckload of nitro glycerin on a bumpy road”.

Mr Gross noted that the world economy has generated more debt relative to gross domestic product than it did ahead of the 2008 financial crisis. Credit across the US economy of $65tn equates to 350 per cent of GDP, while China’s leverage ratio has doubled over the past decade to nearly 300 per cent, he noted.

“If rates are too high (and credit as a per cent of GDP too high as well), then potential Lehman black swans can occur,” he said.

“On the other hand, if rates are too low (and credit as a per cent of GDP declines), then the system breaks down, as savers, pension funds and insurance companies become unable to earn a rate of return high enough to match and service their liabilities.”

OECD Warns There Is A “Disconnect” Between Markets And The Global Economy

In a report released this morning by the Organisation for Economic Cooperation and Development titled “Will risks derail the modest recovery? Financial vulnerabilities and policy risks” the OECD warns the global economy may not be strong enough to withstand risks from increased trade barriers, overblown stock markets or potential currency volatility, and adds that the “disconnect between financial markets and fundamentals, potential market volatility, financial vulnerabilities and policy uncertainties could derail the modest recovery.

The OECD projects global GDP growth to pick up modestly to 3½ per cent in 2018, from just under 3% in 2016, boosted by fiscal initiatives in the major economies, a forecast which is broadly unchanged since November 2016 and notes that while confidence has improved, “consumption, investment, trade and productivity are far from strong, with growth slow by past norms and higher inequality.

Goldman Raises March Rate Hike Odds To 95% After Yellen Speech

Following Yellen’s speech which did not throw any curve balls to this week’s sharply revised, hawkish narrative by her FOMC peers, a March rate hike – according to Goldman – appears to be in the books. In a note moments ago by Goldman’s Jan Hatzius, the investment bank said that the bottom line is that “Fed Chair Yellen said today that a rate increase at the March FOMC meeting “would likely be appropriate”, as long as incoming data continue to confirm officials’ outlook. We see this as a strong signal for action at the upcoming meeting, and have raised our subjective odds of a hike to 95%.”

Goldman’s key points: 

1. In remarks this afternoon, Fed Chair Yellen indicated a readiness to raise the funds rate at the FOMC’s March 14-15 meeting in fairly explicit language. She said that as long as “employment and inflation are continuing to evolve in line with” officials’ expectations, “a further adjustment of the federal funds rate would likely be appropriate”. As a result, we now see a hike at the March meeting as close to a done deal, and have raised our subjective probability to 95%.

 2. The remainder of Chair Yellen’s speech focused on the Fed’s post-crisis monetary policy strategy in general, and did not discuss incoming data in much detail. However, given constructive comments about current economic conditions from many Fed officials this week—including from Vice Chair Fischer at today’s US Monetary Policy Forum—we think committee members will see recent news as consistent with their outlook, and therefore supportive of further tightening. At this stage, the February employment report—to be released next Friday—may have more bearing on the committee’s guidance about action after the March meeting than on its decision whether to hike this month.

The Fed Is Preparing $1 Trillion In QE For The Next Recession: Deutsche

While in recent weeks there has been a material increase in Fed balance sheet normalization chatter, according to a new report from Deutsche Bank analysts, it may all be for nothing for one simple reason: should the US encounter a recession in the next several years, the most likely reaction by the Fed would be another $1 trillion in QE, delaying indefinitely any expectations for a return to a “normal” balance sheet.

As a reminder, as of this month, the duration of the latest expansionary cycle – as defined by the NBER – has reached 93 months, surpassing the 92 months of the 1982-1990 cycle, and is now the third longest in history. Should the cycle persist for another 27 months, or just under two and a half years, it would be the longest period of “economic growth” in history.