Following China’s 50bps RRR cut this morning, coupled with a 25 bps easing in deposit and lending rates, there have been numerous strategist reactions, most of which suggesting what the PBOC did was in response to China’s crashing stock market and slowing economy. But mostly the market, and not so much China’s perhaps as that of Europe: moments ago Eurostoxx closed up a whopping 5.0% with the Dax soaring 5.32%. As a reminder, the German stock market has been the most punished among western bourses due to concerns trade with China will deteriorate leading to a drop in German exporter revenue and profitability.
And yet, hours before the RRR announcement, a Bloomberg note came citing “people familiar with situation ” which said that China halts intervention in stock market so far this week as policy makers debate merits of an unprecedented government campaign to prop up share prices and what to do next. The note added that some leaders support argument that stock market is too small relative to broader economy to cause crisis, adding that “leaders also believe intervention is too costly.”
So how does one reconcile China’s reported detachment from manipulating the stock market having failed to prop it up with the interest rate cut announcement this morning.
The missing piece to the puzzle came from a report by SocGen’s Wai Yao, who first summarized the total liquidity addition impact from today’s rate hike as follows “the total amount of liquidity injected will be close to CNY700bn, or $106bn based on today’s onshore exchange rate.” And then she explained just why the PBOC was desperate to unlock this amount of liquidity: it had nothing to do with either the stock market, nor the economy, and everything to do with the PBOC’s decision from two weeks ago to devalue the Yuan. To wit:
The Government has dropped plans to utilise gold mobilised under the proposed monetisation scheme for meeting mandatory liquidity requirements for banks, as it wants to avoid another confrontation with RBI.
Government dropped plan to use gold deposits as part of CRR, SLR in gold monetisation scheme because of opposition from RBI, sources said.
The Gold Monetisation Scheme is expected to be launched by the first week of September and the Cabinet approval for the same is expected in a couple of weeks, sources said.
“RBI had argued against using gold deposits as CRR and said the move will weaken CRR as a monetary policy tool. The Government does not want to open to many fronts with RBI,” sources said.
Among others, the government and the RBI had differed on issues related to the proposed monetary policy committee for setting interest rates, although the differences are believe to have sorted out now.
The Cash Reserve Ratio (CRR) is the portion of the total deposits, which has to be kept with RBI in cash, while Statutory Liquidity Ratio (SLR) is the portion of deposit compulsorily parked in Government securities.
“To incentivise banks, it is proposed that they may be permitted to deposit the mobilised gold as part of their CRR/SLR requirements with RBI. This aspect is still under examination,” the draft guidelines on Gold Monetisation Scheme issued in May had said.CRR is at 4 per cent while SLR is at 21.5 per cent. So, 25.5 per cent of the cash deposit mobilised by banks are locked in these two statutory ratios.
If gold mobilised through scheme is allowed to meet CRR/SLR requirements, the value of the metal will be considered as deposits for meeting the reserve ratios.
The Federal Reserve’s top rate setters will soon have to acknowledge the US economy is near an “acceptable normal,” according to one of its policymakers.
Dennis Lockhart, the president of the Atlanta Fed who has a vote on interest rates this year, told an audience in Atlanta on Monday that:
The economy has made great gains and is approaching an acceptable normal. Policy should shortly acknowledge this reality. The Fed took extraordinary policy measures in response to extraordinary economic conditions. Conditions are no longer extraordinary.
Fears that the Greek crisis could derail a move to tighten monetary policy have eased, said Mr Lockhart, who last week moved financial markets when he said he’d vote to raise the Fed’s short-term interest rate in September unless the economy deteriorates over the next month.
The central banker underlined that point again on Monday, arguing:
In a dynamic economy, an action not only triggers just one effect, but always an entire series of different consequences. While the cause of the first effect is easily recognizable, the other effects often occur only later and no such recognition occurs. Frédéric Bastiat described this phenomenon in 1850 in his ground-breaking essay “What Is Seen and What is Not Seen”:
In the economic sphere, an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them …
There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen. Yet this difference is tremendous; for it is almost always the case that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Hence it follows that the bad economist pursues a small present good that will be followed by a great evil, while the good economist pursues a great good to come, at the risk of a small present evil.
An economic slowdown is underway in China. This is reflected in the steep drop in the commodity complex and in the currencies of emerging market countries. Large imbalances are being worked off as Beijing attempts to shift the composition of its growth. Policy decision are not always economic.
New sources of growth are being sought by Beijing as deleveraging occurs. Since officials care foremost about social stability, they try to preserve as many current jobs as possible during their attempt at economic transformation. During this period, banks might be averse to calling in loans. State owned enterprises (SOEs) are pressured to keep producing, so that workers can continue to receive a pay check. The result is over-production and downward pressure on prices. Part Two, The Seven Year Fed Subsidy
The Fed’s zero interest rate policy has provided a subsidy to investors for the past 7 years. The lure of easy profits from cheap money was wildly attractive and readily accepted by investors. The Fed “put” gave investors great confidence that they could outperform their exceptionally low cost of capital. These implicit promises by central banks encouraged trillions of dollars into ‘carry trades’ and various forms of market speculation.
Ahead of the Reserve Bank of India’s keenly watched policy review, the finance ministry on Monday said it hadn’t planned to take away the power of the central bank’s governor to set interest rates, hoping to end a controversy caused by a revised Indian Financial Code (IFC) draft put out by the ministry recently.
However, while finance secretary Rajiv Mehrishi said the government’s view on the composition and mode of functioning of the proposed Monetary Policy Committee (MPC) was yet to be firmed up (“It would be known when the IFC Bill is tabled in Parliament”) and asserted that the draft was merely a discussion paper for the public to comment on, he could not remove the veil over who exactly was responsible for the new proposal to remove the governor’s veto power in the MPC.
The mystery about the ownership of the proposal only intensified after Mehrishi’s press conference, which followed the disowning of the revised draft by both the Financial Sector Legislative Reforms Commission (FSLRC) chairman justice BN Srikrishna and its member M Govinda Rao.
“We (the ministry) did the task of collection and collation (of suggestions received). No decision has been taken (and) all the options (are) being discussed,” Mehrishi told media persons. Asked who owned the revised IFC draft, the official was evasive.
“People of India own the draft…(which) is still to be considered by the government as a discussion paper. So…to jump to a conclusion that some curtailment of the power of the RBI has been made or the government has decided to do so would be incorrect,” he added.
Typical of a recession, the last few quarters have witnessed developers across the country, and more so in the National Capital Region (NCR), go slow on launching new projects and instead focus on completion and delivery of existing projects. A report released by Knight Frank shows that the NCR is facing the biggest stress in real estate across the country with new launches and sales hitting a decade low.
While, housing sales in NCR fell by 50 per cent during first six months of this year, new home launches declined by 68 per cent over the corresponding period last year. Story across other seven major hubs — Mumbai, Bengaluru, Pune, Chennai, Hyderabad, Kolkata and Ahmedabad — is no better.
In an otherwise unremarkable statement from the Federal Reserve’s rate setters, a single word is getting plenty of attention.
The US central bank said that it would “be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market”, suggesting the data only need to improve modestly from current levels to warrant a rise in interest rates.
Here economists and strategists react:
Alan Ruskin, a strategist with Deutsche Bank, said the addition of the word ‘some’ was the strongest indication yet that the central bank was creeping closer to a rate rise.
September is probable if the next 2 payroll releases are decent … Odds of a Sept hike should appropriately head meaningfully higher and stay there unless the coming payrolls data contradicts. This statement is USD friendly for sure, but suspect that in this whippy summer market the follow-through will be restrained.
James Knightley of ING also picked up the word ‘some’, in what he said was “one very subtle change”.
Here’s Hilsenrath’s 593-word take via WSJ on the Fed’s 539-word statement:
The Federal Reserve on Wednesday kept interest rates near zero but cited progress in the U.S. job market, a sign it remains on course to raise interest rates in September or later this year.
At the same time, however, it flagged a nagging concern about low inflation, which is creating caution among officials and could convince them to delay the day of the first increase.
The Fed concluded its two-day policy meeting with a decision to leave its benchmark federal funds interest rate near zero, setting officials up for a potentially difficult call at the meeting to be held September 16-17.
Fed Chairwoman Janet Yellen has said officials expect to raise rates this year. The central bank has three scheduled policy meetings left to act, September being the next one. Wednesday’s policy statement didn’t send an overt signal about timing, giving the Fed an option for action by September but not a clear commitment to it.
Central to the Fed’s thinking is how it perceives its progress in achieving its “dual mandate” of maximum employment and inflation near 2%.
The Fed has said it will raise rates when it has seen improvement in the job market and becomes “reasonably confident” inflation is on course to return to 2%.
EM remains caught in global crosscurrents that are mostly negative. If risk off sentiment ebbs as Greek and Chinese tail risks fall, then that simply brings the focus back on the looming Fed lift-off. We expect EM to remain under pressure in Q3. We also see continued pressure on industrial metals and oil, which spells out differentiation in the EM asset class.
The good news is that EM inflation trends are fairly subdued, with a few notable exceptions such as Brazil and Russia, and a resolution of the Greek drama could improve the global growth outlook. We also expect more stimulus measures from China. The big new tail risk to watch now is the increased probability of an impeachment process getting started in Brazil. This is still a small chance in our view, but it’s growing.
Singapore reports advance Q2 GDP Tuesday, expected to rise 2.4% y/y vs. 2.6% in Q1. It reports May retail sales Wednesday, expected to rise 3.0% y/y vs. 5.0% in April. It then reports June trade Thursday, with NODX expected to rise 2.0% y/y vs. -0.2% in May. The economy is losing momentum, which could push the MAS into a more dovish stance at its next policy meeting in October.
Bank Indonesia meets Tuesday and is expected to keep rates steady at 7.5%. With inflation at 7.3% y/y well above the 3-5% target range, we think steady rates are likely for the time being even though the real sector is slowing. Indonesia reports June trade Wednesday, with exports expected at -16.5% y/y and imports at -20.3% y/y.