Fri, 21st October 2016

Anirudh Sethi Report


Archives of “interest rate” Tag

ECB Wants To Curb Bitcoin Use Over Fears It May “Lose Control Over Money Supply”

The first time the ECB officially warned about the dangers of virtual currencies in general, and in particular, bitcoin – what was then a mostly unknown currency trading in the single digits (in USD terms) – was in November 2012 when in a report called “Virtual Currency Schemes” it warned that “in an extreme case, virtual currencies could have a substitution effect on central bank money if they become widely accepted. The increase in the use of virtual money might lead to a decrease in the use of “real” money, thereby also reducing the cash needed to conduct the transactions generated by nominal income. In this regard, a widespread substitution of central bank money by privately issued virtual currency could significantly reduce the size of central banks’ balance sheets, and thus also their ability to influence the short-term interest rates. Central banks would need to look at their existing tools to deal with this risk (for instance, trying to impose minimum reserve requirements on virtual currency schemes).”

Ironically, since then the ECB has moved significantly down the narrative of currency substitution, and in fact, following a recent push to eliminate paper currency (now that the €500 bill is no longer produced) the central bank has been urging for a shift away from real, paper money and into electronic variants.

However, overnight in a surprising reminder how the European central bank feels about bitcoin and other virtual money, the ECB urged EU lawmakers to tighten proposed new rules on digital currencies such as bitcoin, fearing they might one day weaken its own control over money supply in the euro zone.

In other words, first the ECB went after cash; now it is going after all virtual currencies like bitcoin.

According to Reuters, the European Commission’s draft rules, aimed at fighting terrorism, require currency exchange platforms to increase checks on the identities of people exchanging virtual currencies for real ones and report suspicious transactions.

In a legal opinion published on Tuesday, the ECB said EU institutions should not promote the use of digital currencies and should make clear they lack the legal status of currency or money.

MPC bets on benign inflation

All the six members of the monetary policy committee, which earlier this month unanimously decided to cut the policy rate, sounded dovish on the inflation outlook even as a few of them called for monitoring the upward risks so that retail inflation stays at the target level of 5 per cent by March 2017.

According to the minutes of the meeting released today by the RBI, the external members indicated that inflation is unlikely to pose a problem, though there are upside risks. The panel had met on October 3 and 4.

One of the members Ravindra Dholakia said the chances of inflation rising from the current level were reasonably less. “However, there are good chances that consumer inflation will soften further, benefiting from a good monsoon, supply management measures and the government’s ongoing reforms,” he said.

 Another member Pami Dua said while a survey conducted by the RBI on households suggested elevated inflation expectations, the consumer confidence survey echoed opposing views.

Emerging Markets: An Update

EM FX gained a little traction on Friday, but capped a week of steady losses.  As the US election and FOMC meeting next month get closer, we believe markets and risk appetite will remain volatile.  So far, September data from the US does not suggest any urgency to hike in November, and so we continue to believe that December is most likely for another hike.
Looking at individual countries, South Africa political risk remains high as the feud between Gordhan and Zuma plays out.  The Turkish central bank meets, and any jawboning by the government could weigh on the lira.  On the other hand, Brazil is likely to continue outperforming, as COPOM is likely to follow up recent fiscal consolidation efforts with the first rate cut of this cycle.
Brazil reports August retail sales Tuesday.  COPOM then meets Wednesday and is expected to cut rates 25 bp to 14.0%.  Mid-October IPCA inflation will be reported Friday, which is expected to rise 8.3% y/y vs. 8.78% in mid-September.  Last week’s cut in fuel prices won’t show up yet, but does suggest falling price pressures ahead.  Along with progress on the government spending cap bill, we think developments support a potential 50 bp cut this week.

Colombia reports August retail sales and IP Tuesday. 
The former is expected at –0.5% y/y and the latter at +3.0% y/y.  The economy has softened from both fiscal and monetary tightening, but the recent bounce in oil prices (if sustained) will help boost growth.  Inflation peaked and has fallen to 7.3% y/y in September.  This is the lowest since December, but remains above the 2-4% target range.  We think easing is unlikely until we are well into 2017.

BOJ Kuroda: To adjust policy as needed to hit 2 pct price goal

Bank of Japan Governor Haruhiko Kuroda said on Monday the central bank will adjust monetary policy as needed to achieve its 2 percent inflation target with an eye on economic, price and financial developments.

“Japan’s economy is expected to expand moderately as a trend,” Kuroda said in a speech at the central bank’s quarterly meeting of its regional branch managers.

 The BOJ last month switched its policy to target interest rates and away from expanding the monetary base – or the pace of money printing – after years of massive asset purchases failed to jolt the economy out of decades-long stagnation.

Deutsche Bank’s woes may only be tip of European iceberg

These are challenging times for the European economy, with Brexit looming and the Greek bailout again becoming the focus of attention. But the issue dominating concerns in Brussels and Frankfurt is the state of the European banking sector.

Europe’s banking woes dominated debate on the fringes of last week’s annual autumn meeting of the IMF and World Bank in Washington, with senior bankers and policymakers from both sides of the Atlantic pitching-in with the latest take on the sector.

The IMF said that euro zone lenders threatened to undermine the global economy, while senior figures in US banking such as Goldman Sachs president Gary Cohn contrasted the current state of European banks with their US counterparts, who are “in the best shape ever”.

Despite the low profitability of the sector and the continuing problems in Italian banks in particular, the travails of Deutsche Bank have really propelled the issue into the spotlight.

Last month the German government was forced to deny it would bail out its biggest bank after concerns about the ability of it to absorb a fine of up to $14 billion €12.4 billion) levied by the US justice department over its misselling of mortgage-backed securities.

Deutsche Bank, which only just scraped through European bank stress tests in July, is now facing reports that it was given special treatment by the European Banking Authority (EBA) after the European Central Bank (ECB) granted the bank a special concession. This allowed it to include the proceeds from selling its stake in a Chinese bank to boost its stress test results, even though the deal has yet to go through.

The bank is now in the process of devising a restructuring plan, which may involve a flotation of its asset management unit, according to some reports.

Brace Yourself For The Quadrillion-Dollar Reckoning

The ever more extreme antics of our central bankers keep forcing us to find new ways to describe them. My good friend Danielle DiMartino Booth does this by drawing an interesting historical parallel.

Danielle takes us back to the 20th-century era of World Wars and draws upon Liaquat Ahamed’s. The Lords of Finance. His work was inspired by that 1999 Time magazine cover story “The Committee to Save the World.” You may recall it: the lovely mugs of Alan Greenspan, Robert Rubin, and Larry Summers up there, grinning like the Cheshire Cat.

Danielle says that Ahamed’s work is “a study [of] the perils of devaluing stores of value by force, the dangers of runaway debts, and the menace of monetary myopia.” Franklin Roosevelt devalued the Depression-weighted US dollar by forcing up the price of gold. At the same time, Germany couldn’t pay its World War I debts. This set off a chain of defaults among US allies. The US then had to bail out Germany’s debt. Central bankers around the world began competitive interest rate rises. That move caused their countries to hold onto their dwindling gold supplies, even though the floundering global economy needed lower interest rates.

Fast-forward to today. Danielle points out that “the debt is simply everywhere, at least to the extent we can see and measure it. Corporate and sovereign debt, of both the developed world and emerging market varieties, are at record levels. China’s debts certainly add to that record but who really knows to what extent? It’s the ultimate black box of leverage on Planet Earth.”

ead on to see why Danielle doesn’t think “a perverted gentlemen’s agreement” among central bankers, politicians, and investors will stave off a quadrillion-dollar reckoning.

The Overlords of Finance

By Danielle DiMartino Booth

Next Week Eyes on -European monetary policy, corporate America, US politics and Chinese growth

European monetary policy, corporate America, US politics and Chinese growth all demand investor attention next week.

Here’s what to watch in the coming days.

European Central Bank

“Nevertheless, given the resilience in growth, the pick-up in inflation, and concerns about the negative side effects of low interest rates and bond yields, we believe a tapering decision on 8 December should not be dismissed easily,” Reinhard Cluse, economist at UBS, said.

Economists expect the central bank will leave its interest rates unchanged next week.

Clinton-Trump debate

Across the Atlantic US politics and corporate America grab the spotlight. Democratic presidential candidate Hillary Clinton and Republican candidate Donald Trump will face off at the University of Nevada, Las Vegas for the final debate ahead of the 2016 elections. The 90-minute debate will be moderated by Fox News anchor Chris Wallace.

Mr Trump heads to the match-up amid a fresh string of allegations that he groped or sexually assaulted women, following the release of a video earlier this month in which he bragged about groping women. For Mr Trump, who has in recent weeks lost the support of many top Republicans, this could be a final chance to bounce back in the polls.

Fischer on Low Interest Rates

Low Interest Rates
Vice Chairman Stanley Fischer
40th Annual Central Banking Seminar, FRBNY, October 5, 2016

I would like to thank the Federal Reserve Bank of New York for establishing this seminar 40 years ago and for maintaining it since then. This event has always been a useful forum for sharing knowledge and experiences among the world’s central banks, something that has become especially valuable in the years since the Great Recession. This seminar has also fostered a stronger sense of community among central banks, whose interactions undergird the global financial system.1

I will talk today about an issue that currently confronts almost all central banks: historically low interest rates. Indeed–as shown in figure 1–in an increasing number of countries, they have even dipped below zero. Ultralow interest rates have not been limited to the short end of the yield curve, which is most directly affected by monetary policy. Figure 2 shows that longer-term interest rates–which embed market participants’ expectations of where real short-term rates and inflation are likely to be in the future–have also been exceptionally low.

The low interest rate environment presents us with four key questions: (1) Are ultralow interest rates part of the so-called new normal for the global economy, or are they mostly transitory? (2) How concerned should we be, if at all, about the current interest rate environment? (3) What determines the level of interest rates over the longer run? (4) What can policymakers do about chronically low interest rates?

Singapore Q3 GDP Crashed : 0.6% y/y (expected +1.7%) (Also, MAS statement)

Singapore third quarter GDP )’advanced’ estimates, i.e the first estimate)

0.6 % y/y
  • expected 1.7%, prior 2.1%
 -4.1 % q/q (annualised)
  • expected 0%, prior 0.3%
Big miss on both y/y and q/q. The q/q annualised is very poor indeed. I’m seeing some analysts suggest the Singapore economy is ‘crashing’ … this from the usual sort of suspects, but they’ve got a point on this data.
Simultaneously the Monetary Authority of Singapore’s Monetary Policy Statement
Headlines via Reuters:

FOMC Minutes: Several voters thought rates should rise ‘relatively soon’

Highlights of the minutes of the Sept 21, 2016 FOMC decision:

  • Policymakers noted there was a ‘reasonable argument’ for either hiking in Sept or waiting for additional data
  • Voting policymakers generally agreed the case for hiking had strengthened
  • Several voters and non-voters said it was a ‘close call’ on whether to hike in Sept
  • Many noted few signs of inflation and slow progress
  • Cautious approach could allow labor market to heal more
  • A few expressed worries over reference to postponing hike ‘for the time being’
  • Fed sees risks to growth domestically and abroad as tilted to the downside
  • Inflation risks also tilted to the downside
  • Full text

We’ve heard the ‘close call’ talk from Fed speakers since the meeting so it shouldn’t be a big surprise. Overall, it’s a tad hawkish but with Dec already priced at 70%, I’m not sure it can move much higher.

“It was noted that a reasonable argument could be made either for an increase at this meeting or for waiting for some additional information on the labor market and inflation,” the Minutes said.

Here’s the dovish view, which is also something we’ve heard: