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Fri, 20th January 2017

Anirudh Sethi Report

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Archives of “interest rate” Tag

Draghi refuses to comment on Trump EU claims; tells Germans to ‘be patient’

Mario Draghi has refused to respond to Donald Trump’s claims on the EU’s disintegration, saying he was unwilling to talk about the president-elect’s stance that keeping the federalist project together will be “harder” than imagined.

At his latest press conference in Frankfurt, Mr Draghi said he would only respond to “policies rather than just statements”, ahead of Mr Trump’s inauguration as president tomorrow.

The Italian was however more vocal on German criticism of the ECB’s record low interest rates, telling savers in Europe’s largest economy to “be patient” in the wait for higher interest rates.

“Real rates will go up” as the recovery regains momentum he said.

Mr Draghi’s broadly dovish tone on inflation has seen the euro weaken to its lowest in 10 days this afternoon. The ECB president said much of the recent spike in prices was down to higher energy prices with wage growth and other evidence of higher economic activity still low.

He also refused to make any comment on the looming bailout of one of Italy’s biggest banks and the implementation of new EU rules which will impose losses on junior bondholders.

Will ‘Dull Draghi’ Talk Up Downside Risks? – ECB Press Conference Live Feed

With Yellen hell-bent on tightening into Trump’s fiscal stimulus, and inflationary impulses popping up all around the world, ECB president Mario Draghi better note some serious downside looming (after leaving rates/taper unchanged) that opens the door to his un-tapering or the stagflationary pressures building everywhere willcome back to bite his precious asset prices.

As we noted earlier, with the market not expecting any changes from the ECB this morning, so far that is precisely what it got, when moments ago the ECB announced that it kept all of its rates unchanged as expected, keeping the rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility at 0.00%, 0.25% and -0.40%, respectively.

In additional language relating to non-standard measures, the ECB also said that “it will continue to make purchases under the asset purchase programme (APP) at the current monthly pace of €80 billion until the end of March 2017 and that, from April 2017, the net asset purchases are intended to continue at a monthly pace of €60 billion until the end of December 2017, or beyond, if necessary” and “in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.

It also said that “the net purchases will be made alongside reinvestments of the principal payments from maturing securities purchased under the APP” and cautioned that “if the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the programme in terms of size and/or duration.” 

In other words, it may move QE up or down, depending on what happens with inflation, in line with the ECB’s December announcement.

Watch these 5 events for Next Week

What events and releases will impact trading in the week starting Jan 16th.

  1. ECB interest rate statement. Thursday 7:45 AM ET/1245 GMT.  ECB Draghi press conference to follow at 8:30 AM ET/1330 GMT.   The ECB will meet next week and announce that rates will remain unchanged.  The last meeting the ECB moved increase the types of bonds that could be purchased for QE purposes (read German notes). That included bonds with yields below the -0.4% deposit rate. In addition, they lowered the maturity requirement to one-year from two- years (read German notes).  However, they also reduced the amount of QE purchases from 80B Euro to 60B Euro until the end of December.  There will be no change in policy, nor change in QE. So the focus will be squarely on the comments from Draghi during his traditional prepared statement and then Q&A.  Will he sway more toward the hawkish Germans or keep committed to the the same path..
  2. Bank of Canada rate statement.  Wednesday at 10 AM ET/1500 GMT. Press conference at 11:15 AM ET. The bank will also release its quarterly Monetary Policy Report (MPR) at 10 AM ET.  Stephen Poloz and Senior Deputy Gov. Carolyn Wilkens will give a statement and hold a press conference. The rate is expected to remain unchanged at 0.5%. In their last MPR, they saw 2017 CPI at 1.9% and core CPI at 1.7%. That was down from earlier projections of 2.1% and 2.0% respectively. For GDP they estimate growth of 2.2% (up from 2.1%).

  3. US CPI/Core CPI. Wednesday at 8:30 AM ET/1330 GMT. The US will release consumer price data for December with expectations for MoM rising by 0.3% (vs. +0.2% last month). The Ex Food and energy is expected to increase by +0.2%  (vs +0.2% last).   The YoY numbers are expected to rise to 2.1% from 1.7% and 2.2% from 2.1%. The core YoY ended 2015 at 2.1% with the high extending to 2.3% in Feb and again in August

  4. Australia employment change. Wednesday at 7:30 PM ET/Thrusday 0030 GMT. The Australian employment report is expected to show employment change of 10.0K vs 39.1K last month. The gain last month was well above the estimate of 17.5K. The unemployment rate did move higher to 5.7% last month from 5.6%. The estimate is for the rate to remain at 5.7%.  Last month full time employment rose by 39.3K. The part time employment fell by -0.2K.
  5. UK Retail sales. Friday at 4:30 AM ET/0930 GMT. The November retail sales in the UK are expected to to dip by -0.1% vs. +0.2% estimate last month. Ex auto fuel a larger -0.4% decline is forecast. The YoY changes are expected to show healthy 7.2% and 7.5% gains respectively.
Other key events/releases

Jeff Gundlach’s Forecast For 2017

Investors will confront excessive debt, high P/E levels and political uncertainty as they enter the Trump presidential era. In response, according to Jeffrey Gundlach, U.S.-centric portfolios should diversify globally.

Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital, a leading provider of fixed-income mutual funds and ETFs. He spoke to investors via a conference call on January 10. Slides from that presentation are available here. This webinar was his annual forecast for the global markets and economies for 2017.

Before we look at his 2017 predictions, let’s review his forecasts from a year ago. His two highest conviction forecasts were that the Fed would not raise rates more than once, despite the Fed’s own predictions, and that Trump would win the presidency. Both predictions were accurate.

But he was also downbeat on emerging markets, and singled out Brazil and Shanghai as likely underperformers. Brazil turned out to be the best-performing emerging market last year, gaining 69.1%, but he was correct about Shanghai, which was the worst performing market, losing 16.5%.

Gundlach said he had a “low conviction” prediction that the yield on the 10-year Treasury would break to the upside. It began 2016 at 2.11% and ended at 2.45%. He said the probability was that U.S. equities would decline in 2016, yet the markets gained approximately 13%. Gold, he said, would hit $1,400 at some point in 2016. It began the year at approximately $1,100, hit a high of $1,365 during the summer and closed at approximately $1,150. 

Brazil slashes rates by 75bps to 13% in surprise move

Don’t anyone accuse Brazil’s central bank of not being bold.

In a unanimous decision, the bank cut its policy interest rate by 75 basis points on Wednesday, exceeding the consensus call for a 50bps cut and sharply picking up the pace on an easing cycle it began with two back-to-back cuts of 25bps each in October and November

In a statement, the bank said economic activity had fallen below expectations and that a recovery would take longer than previously anticipated.

The size of the cut will be welcomed by many, given the economy’s stubborn refusal to return to growth. The rebound expected by many when congress ditched president Dilma Rousseff last year has failed to happen. GDP contracted by 8 per cent over the past two years under Rousseff’s watch; her pro-growth, market-friendly successor, Michel Temer, was expected to turn things round quickly.

India :NPA pains to spill over into next fiscal: Moody’s

Weak asset quality will continue to plague credit profile of banks, with their profitability remaining under pressure till the next fiscal, says a report.

“Asset quality will remain a negative driver of the credit profiles of most rated banks in the country and the stock of impaired loans. Non-performing loans and standard restructured loans will still rise during the horizon of our outlook that lasts till the next financial year,” Alka Anbarasu, a vice-president and senior analyst at Moody’s, said in a report today.

The report is jointly penned by Moody’s and its domestic arm Icra Ratings. The report said the pressure on asset quality largely reflects the system’s legacy problems, as relating to the strong credit growth seen in 2009-12, when corporate investments rose significantly.

It, however, said aside from the legacy issues, the underlying asset trend for banks will be stable because of a generally supportive operating environment.

“While corporate balance sheets stay weak, a further deterioration in key credit metrics such as debt/equity and interest coverage ratios has been arrested,” the report said.

How to Become a Trillionaire and Other Thoughts

Grab one of these:

zimbabwe_jan7

Careful what you wish for central bankers and fiscal policy makers.  Though we don’t see signs of “rollover risk” in any of the G5 or G20, it’s all about confidence and you know what Joe said about confidence:

Confidence is a very fragile thing.  – Joe Montana

.The World Economic Forum reports this about Zimbabwe’s ghost of hyperinflation past,

Zimbabwe was once so gripped by hyperinflation that the central bank could no longer afford paper on which to print practically worthless trillion-dollar notes. 

The government reported in July 2008 that Zimbabwe was experiencing inflation of 231 million percent (231,000,000%). However, the Libertarian think tank, the Cato Institute, believes that the real inflation rate was 89.7 sextillion percent or 89,700,000,000,000,000,000,000%.

It is interesting to note that the country is now grappling with the opposite problem.

Like Britain, Japan, the US and other nations dealing with the consequences of weak demand and cheap oil, Zimbabwe is threatened more by the prospect of falling prices. But that doesn’t mean its people are ready to trust that hyperinflation won’t happen again.

Note ban most disruptive policy innovation since 1991: Subbarao

Former Reserve Bank governor D Subbarao on Thursday termed demonetisation as “creative destruction and the most disruptive policy innovation since 1991 reforms” that has helped destroy black money.

“On November 8, the Prime Minister (Narendra Modi) and the Reserve Bank have demonetised 86 per cent of currency in circulation overnight, which is what is arguably the most disruptive policy innovation in India since the 1991 reforms,” he said.

“Demonetisation, in that sense, is creative destruction. But it is a very special type of creative destruction. Because what it has destroyed is a destructive creation — black money. So, you can understand that demonetisation is creative destruction of a destructive creation,” Subbarao said.

He was addressing an international conference organised by the Institute for Development and Research in Banking Technologies (IDRBT) in Hyderabad. He further said demonetisation is “arguably” leading to a flurry of innovations in Indian financial sector by way of digitisation of payments.

The life of EURUSD in 2017 by Danske Bank

The jolly chaps and chapesses at Danske Bank have the euro all mapped out for next year

Danske see EURUSD bottoming at 1.0200 in their 1 month forecast.

“In the short term, on the one hand there will be downward pressure on the US monetary base from the higher federal funds target and from the impact of new banking regulation with US banks set to be required to have an LCR of 100% by 1 January 2017. On the other hand, deposits on the US treasury account may fall at the beginning of next year after a resuspension of the debt ceiling, which will tend to increase the monetary base. Overall, this is likely to be marginally positive for USD and weigh on USD FX forward points vis- à-vis EUR and the Scandinavian currencies on top of the impact of the repricing of the path of Federal Reserve rate hikes, e.g. keeping the 3M EUR/USD basis spread around the present 70-80bp, and thus maintaining a significant negative carry on short USD positions.”

In 12m they see the euro at 1.1200.

Demonetisation double whammy for India Inc: Demand slows as input prices surge

Companies are going to face a potentially peculiar situation following demonetisation, if the recently released inflation data are any indication. While a demand slowdown following the cash crunch could force producers to either cut or hold prices, their input prices are tending to go up owing to rising global commodity rates.

Latest data revealed retail inflation touched a two-year low of 3.63% in November, while wholesale price inflation eased to 3.15% from 3.39% in October. However, the Thomson Reuters/CoreCommodity CRB Commodity Index, which tracks the movement of 19 major commodities, has advanced 11.1% in the past one year and 8.6% so far in 2016.

Pronab Sen, former chairman of the National Statistical Commission, told FE: “The demand slowdown following demonetisation should put a downward pressure on prices, while the increase in input prices due to rising global commodity rates will put an upward pressure on prices. And what the net effect will be is very difficult to predict now. But companies may have to recalibrate their (pricing) decisions accordingly.”

Key global oil-producing countries’ decision to cut back on output has already driven up crude oil prices. Also, although China’s appetite for raw materials has been strained since last year, a renewed focus on manufacturing (along with services) by the US under President-elect Donald Trump has only complicated outlook of global commodity demand. “As more firms shift from the informal to the formal sector following demonetisation, “there is also a risk that tax increases are passed to consumers,” Nomura’s Sonal Varma said.