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Wed, 22nd February 2017

Anirudh Sethi Report

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Archives of “monetary policy” Tag

Negative rates put corporate Japan in a spending mood

The introduction of negative interest rates a year ago by the Bank of Japan is prompting listed companies here to funnel the money they save on borrowing costs toward takeovers and capital investment.

The average borrowing rate of 1,387 nonfinancial companies listed on the first section of the Tokyo Stock Exchange and which released their third-quarter results by December 2016 has shrunk to an estimated 1.06%, down 0.11 percentage point from a year earlier. Interest-bearing debt has increased nearly 1 trillion yen ($8.84 billion) to about 207 trillion yen, while interest payment costs have fallen 10% to about 1.63 trillion yen. Some 30% of the companies have increased their borrowings.

 Telecommunications giant SoftBank Group is one of the companies that has benefited the most from negative interest rates. Chairman and CEO Masayoshi Son bought British chip designer ARM Holdings for about 24 billion pounds ($29.8 billion) at the current rate in 2016 and has announced other bold global plans.

SoftBank’s interest-bearing debt has jumped 16%, or about 1.9 trillion yen, to a little more than 14 trillion yen over the past year. However, its average borrowing rate — obtained by dividing interest payment costs by average interest-bearing debt — was 3.53%, down 0.18 percentage point.

Negative interest rates have also lowered borrowing costs for corporate bonds. Borrowing costs for SoftBank seven-year bonds issued in April 2016 were 1.94% per annum, 0.19 percentage point lower than the cost for the seven-year bonds it issued six months earlier.

Next Week -Watch out :Week ahead: Greece, Fed minutes, Buffett letter

Don’t be fooled by the the holiday-shortened trading week in the US. Next week promises to give investors plenty to watch, including the Greek bailout, minutes of the Federal Reserve’s last meeting, Bank of England governor Mark Carney’s testimony, retail earnings and Warren Buffett’s annual letter.

Here’s what to look for in the coming days.

Greece

The meeting has also gained additional significance, as the last major one slated before European elections begin next month, starting with the Dutch.

“With the two largest eurozone economies facing elections this year, we believe it is in
their policymakers’ interests to contain any potential risks from Greek disruption,” said economists at Nomura. “We therefore expect some transitory agreement to be reached at least at the eurozone level, with the IMF decision on programme participation likely to be delayed even further”.

Carney testimony

Following Federal Reserve chair Janet Yellen’s semi-annual testimony to Congress, investors get to hear from her UK counterpart when Mark Carney testifies before the UK parliament’s Treasury Committee on Tuesday. Mr Carney’s testimony comes after the BoE upgraded its economic forecast, while leaving its inflation forecast and interest-rate policy on hold.

“Since the inflation report was published two weeks ago, we’ve seen downside surprises to wage growth, inflation, and retail sales,” said strategists at TD Securities. “So even after the IR was more dovish than markets expected, we may see a further dovish tone with the IR testimony given the soft tone of the recent data releases.”

Fed minutes

The Federal Reserve will release the minutes of its last monetary policy meeting on Wednesday, though they may seem dated since investors have just heard from Ms Yellen. In her testimony to Congress this week, she painted an upbeat view of the US economy and warned that it would be “unwise” to wait too long before raising interest rates.

Bank of America economists say they believe the minutes will reflect “a great deal of focus on both upside and downside risks,” even as Fed officials “become increasingly constructive on the outlook for the economy.”

Moreover, any discussion on the Fed’s balance sheet is likely to garner interest. “Yellen reiterated the view that the primary tool remains rates and that the balance sheet will only be addressed once the normalization of the fed funds rate is well under way,” said the folks at Bank of America. “We expect the minutes to reinforce this view, but there might be some discussion among members on the issue.”

Moody’s raises outlook on Russia rating to ‘stable’

Moody’s on Friday became the latest ratings agency to lift its outlook on Russia’s credit rating, upgrading it from ‘negative’ to ‘stable’, citing both a fiscal strategy — that is expected to lower the country’s dependence on energy and replenish its savings — and the gradual economic recovery.

The ratings agency had confirmed Russia’s Ba1 rating, which is one notch below investment grade, in April 2016, but assigned it a negative outlook at the time to reflect an erosion of the government’s fiscal savings amid a downturn in crude prices. But on Friday, it said the recovery in the country’s economy following a nearly two-year long recession, alongside the fiscal consolidation strategy, have eased the risks that it had identified last year.

Russia’s deficit-to-GDP ratio is now forecast to narrow by roughly one percentage point per year between 2017 and 2019 and Moody’s said this new target was “achievable” because the government’s “oil price and revenue assumptions are sufficiently conservative”.

Moody’s now believes that the downside risks identified in April 2016 have diminished to a level consistent with a stable outlook. The stabilization of the rating outlook partly reflects external events, and in particular the increase in oil prices to a level consistent with the government’s budget assumptions. The stable outlook also reflects the plans the government has put in place to consolidate its finances over the medium term, and the slow recovery in the economy following almost two years of recession.

Rival raters S&P and Fitch have also boosted their outlook on the country in recent months, as external risks to the oil-producing nation ease.

Overnight US Markets :Dow closed + 92 points -Hits New High

Stocks shook of earlier losses and ended higher Tuesday, led by a rise in bank stocks as major indexes pushed further into record territory.

The Dow Jones industrial average gained 92 points, or 0.5%, to an all-time closing high well above that landmark 20,000 level — and a little over halfway to the next 1,000-point rung, at 20,504.41.

Meanwhile the Standard & Poor’s 500 index rose 0.4% and the Nasdaq composite index gained 0.3%. Both indexes also set new all-time closing highs. All three indexes’ previous closing highs came in Monday’s session.

Bond yields rose after Federal Reserve Chair Janet Yellen said the central bank is still on track to raise interest rates gradually.

Yellen answered questions before a Senate committee, and she said that the strengthening job market and a modest move higher in inflation should warrant continued, gradual increases in interest rates.

Bond yields moved higher immediately following Yellen’s comments. The yield on the 10-year Treasury note rose to 2.47% from 2.43% late Monday.

5 key takeaways from Yellen’s Senate testimony

  1. Didn’t want to put the focus on a specific meeting but said hikes (plural) ahead this year as long as the economy stays on track
  2. She will complete her term, which ends in a year
  3. “I indicated that at our upcoming meetings, we will try to evaluate whether or not the economy is progressing. If so “it probably will be appropriate to raise interest rates further.”
  4. She said that at the start of the year most Fed members concluded “a few” hikes appropriate this year. “Precisely when we would take an action, whether it’s March, or May, or June, I know people are focused on that, I can’t tell you exactly which meeting it would be. I would say that every meeting is live.”
  5. The Fed balance sheet will end up “substantially smaller”

The Fed funds market is now pricing in a 34% chance of a hike. That hasn’t moved up much today but May has moved to 54% from 48% and June to 74% from 71%.

Yellen promised nothing but the market thought she might be a bit more cautious in order to avoid building up hike hopes. Instead, she left the door wide open to a move (and moves) at any time.

So the rally in the US dollar is completely justified. The next question is whether (or when) her talk will be overshadowed by something in Congress or the White House.

China Just Created A Record $540 Billion In Debt In One Month

One week ago, Deutsche Bank analysts warned that the global economic boom is about to end for one reason that has nothing to do with Trump, and everything to do with China’s relentless debt injections. As DB’s Oliver Harvey said, “attention has focused on President Trump, but developments on the other side of the world may prove more important. At the beginning of 2016, China embarked on its latest fiscal stimulus funded from local government land sales and a booming property market. The Chinese business cycle troughed shortly thereafter and has accelerated rapidly since.”

DB then showed a chart of leading indicators according to which following a blistering surge in credit creation by Beijing, the economy was on the verge of another slowdown: “That makes last week’s softer-than-expected official and Caixin PMIs a concern. Land sales, which have led ‘live’ indicators of Chinese growth such as railway freight volumes by around 6 months, have already tailed off significantly. “ 

Fed’s Yellen: Hike appropriate at one of its upcoming meetings

Fed’s Janet Yellen Humphrey Hawkins testimony 14 February 2017

  • Rate hike will likely be appropriate at one of its upcoming meetings if employment and inflation evolve in line with expectations
  • Reiterates the view that three hikes are possible in line with Fed forecasts
  • Repeats, waiting too long to tighten would be unwise
  • Gradual increases in Fed funds rate will likely be appropriate but mon pol is not on a set course
  • Hopes that fiscal policies will be consistent with putting the US on a sustainable trajectory
  • Incoming data suggests that the labour market continues to strengthen and inflation moving up to 2% in line with FOMC expectations

The buck has jumped on what is pretty much a repeat of the last FOMC meeting. USDJPY is up to 114.20 on this.

Traders have jumped on the “upcoming meeting” comment but that’s a straw clutch at best, as far as picking a date goes.

China Jan consumer inflation quickens to 2.5 percent, beating forecasts

China’s consumer inflation rate quickened to 2.5 percent in January from a year earlier, the highest since May 2014 and beating market expectations.

Analysts polled by Reuters had predicted the consumer price index (CPI) would rise 2.4 percent, the biggest gain in nearly three years, versus a 2.1 percent gain in December.

 The producer price inflation rate accelerated to 6.9 percent, the National Bureau of Statistics said on Tuesday, compared with the previous month’s rise of 5.5 percent.

The producer price index (PPI) rose the fastest since August 2011.

The market had expected producer prices to rise 6.3 percent on an annual basis.

Next Week :Yellen testimony, US data, Netanyahu visit

Federal Reserve Chair Janet Yellen’s semiannual testimony takes the spotlight next week as investors watch for clues on US monetary policy and her take on the current political climate.

Here’s what to watch in the coming days.

Yellen testimony

The Fed has signalled three interest rate rises this year. Sticking to its mantra that all meetings are ‘live’, investors will watch for closely watch “how forceful she is in promoting the notion that March is still on the table,” said Tom Porcelli of RBC Capital Markets.

Indeed, federal fund futures currently imply a 13.3 per cent chance of a rate rise next month, according to CME data.

“Given the uncertainty of timing on the fiscal agenda and the relatively modest uptick in inflation thus far this year, we think it will be difficult for the committee to get enough members on board for a hike in March (not to mention that the French election in late April/early May looms large as a potential catalyst for global volatility),” Mr Porcelli said. “But Yellen could certainly move the “perception” needle on this.”

In the Q&A session, Ms Yellen will likely be grilled on Fed independence, the central bank’s economic outlook and its view on Mr Trump’s planned proposals.

US data

Greek unemployment sticks at 23% amid escalating bailout row

Still no respite for Greece.

Amid a fresh escalation in a row over its bailout conditions, Greece’s stubbornly high unemployment rate is showing no sign of improvement.

The country’s jobless rate – which is the highest in the eurozone and has been above 20 per cent for six years – stuck at 23 per cent in November despite a general uptick in its economic prospects at the end of 2016.

The IMF has been accused by Athens and Brussels of an “overly pessimistic” view on the Syriza government’s ability to hit a 3.5 per cent budget surplus target over the next decade, which has led it to a wrong-headed forecast on Greece’s “explosive” debt dynamics.

The Fund’s latest report on the Greek economy suggest its debt-to-GDP mountain could reach 275 per cent over the next two decades without major debt restructuring. Unemployment meanwhile will only fall to 21.7 per cent this year, while the country’s long-term growth rate was downgraded to 1 per cent, IMF economists predict.