Sun, 25th June 2017

Anirudh Sethi Report


Archives of “monetary policy” Tag

China’s holdings of US Treasuries bounce back to six-month high

China’s holdings of US Treasuries rose for the third straight month in April, reaching the highest level since October 2016 at $1.09tn, as weakness in the country’s currency has begun to show signs of stabilising.

It comes after a period of sustained selling by Beijing, with 2016 marking the largest cut to China’s treasury holdings on record. The cut to China’s holdings came as Beijing sought to support the renminbi and manage capital flight by intervening in foreign exchange markets.

So far this year the renminbi has strengthened and China has tentatively returned to the Treasury market, buying $41.1bn of securities since January, with $4.6bn added in April. Still, the country’s holdings remain well below levels at the same time last year of $1.24tn, leading to it slipping into second place behind Japan as the largest foreign holder of Treasuries.

Overall, foreign holders shed $28.6bn bring the total foreign ownership of Treasuries to $6.07tn.

Analysts debate possible September start for Fed balance sheet run-off

Federal Reserve chair Janet Yellen said on Wednesday that the central bank could begin shrinking its $4.5tn balance sheet “relatively soon“, and while she demurred on a specific date, some analysts have now pegged that announcement for September — although others aren’t so sure.

Over the past few months, analysts have tried to piece together a clearer picture of the Fed’s timing for moving on the three expected interest-rate increases this year, as well as when it intends to start the process of unwinding its massive balance sheet.

On Wednesday, the Fed moved forward with its second rate rise of 2017 and unveiled some details of its plan to shrink the balance sheet that has grown to a massive size in the wake of the financial crisis. That has left analysts to ponder when to expect the Fed’s next moves at its four remaining meetings of the year. 

In a note following today’s announcement, Bank of America Merrill Lynch analysts said in a report that they now expect the balance sheet normalisation to begin in September, with the third rate increase of 2017 penciled in for December:

The FOMC statement for June meeting -Full Statement

June FOMC Statement

Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending has picked up in recent months, and business fixed investment has continued to expand. On a 12-month basis, inflation has declined recently and, like the measure excluding food and energy prices, is running somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

Fitch, Moody’s and S&P all issued statements on the risks from the UK election

The three big ratings agencies didn’t make any changes to ratings on Friday, & all still have a negative outlook on their respective ratings for Britain.

All 3 issued statements following the election. In a nutshell, their immediate concerns are the election impact on Brexit negotiations, the potential for another snap election and changes to the path for economic & fiscal policy.
Of immediate focus is the terms of agreement May will reach with the DUP.
GBP not doing too much as the week gets underway, its barely changed from late Friday levels – then again you could say the same for others also. its just gone 7am in Japan & 6am in Hong Kong and Singapore, so we should begin to see a little more action in the next few hours:

Key economic releases this week

For week starting June 12, 2017

The week ahead will be highlighted by the FOMC meeting on Wednesday at 2:00 PM ET/1800 GMT.

The Federal Reserve is expected to raise rates by 0.25% basis points and target 1.25% to 1.50%. This would be the 4th increase in the unwind for the Fed.  The Fed will also give their projections on GDP, employment, inflation and the projection of rates going forward.   They may also give more detail on tapering QE. 

Other key events:


UK CPI 4:30 AM ET/0830 GMT.  The expectation is for YoY to remain unchanged at 2.7%. The Core is expected to decline to 2.3% from 2.4%. MoM is expected to increase by 0.2%.

US PPI for May, 8:30 AM ET/1230 GMT. The US PPI is expected remain unchanged MoM and dip to 2.3% YoY (from 2.5% last).  Ex food and energy the MoM is expected to rise 0.2% vs 0.4% last and remain at 1.9% for the YoY


UK employment statistics will be released at 4:30 AM ET/0830 GMT.  The employment change (3M/3M) is expected to rise by 125K vs 122K last month. The Unemployment rate is expected to remain unchanged at 4.6%.  Average hourly earnings are expected to remain unchanged at 2.4%. 

US CPI for May, 8:30 AM ET/1230 GMT.  US CPI for May is expected to remain unchanged at 0.0% (0.2% last month). Ex Food and energy expected to rise by 0.2%. YoY is expected to decline to 2.0% from 2.2% last month with Ex food and energy remaining unchanged at 1.9%.

US retail sales for May, 8:30 AM ET/1230 GMT.  US retail sales for May is expected to increase by 0.1% for the month (vs +0.4% last month).  The ex auto is expected to rise by 0.1% (vs 0.3%). The control group is expected to rise by 0.3% vs 0.2% last.


Abenomics enters fifth year without clear results

 The Nikkei Stock Average has regained 20,000 points and Japan’s jobs-to-applicants ratio is improving, yet Prime Minister Shinzo Abe’s reluctance to tackle reforms needed for the country’s growth raises questions about the leader’s commitment to his signature economic policy.

“In order for Japan’s economy to achieve more than a recovery and continue stable, long-term growth after that, it is essential to strengthen Japan’s growth potential,” proclaimed a key economic and fiscal policy plan finalized in June 2013, about six months after Abe took office as prime minister for a second time.

 The three “arrows” of Abenomics — aggressive monetary policy, flexible fiscal policy and a growth strategy that promotes investment — grabbed the market’s attention and drew investors to Japan.

Two of out three arrows

That was four years ago, and the government approved the fifth iteration of the plan Friday. But the country’s potential growth rate now stands at 0.69%, according to the Bank of Japan, compared with 0.84% in the second half of fiscal 2014 — a sobering take on what Abenomics has actually accomplished.

The government and the central bank have focused on the first two arrows. The BOJ’s total assets have topped 500 trillion yen ($4.53 trillion), while long-term interest rates remain around zero. In terms of fiscal policy, Japan has passed seven supplementary budgets in just five years, spending about 25 trillion yen in the process.

“Extreme fiscal spending and other measures have led to a distorted allocation of resources in the economy and reduced productivity,” said Ryutaro Kono, chief Japan economist at BNP Paribas. Monetary and fiscal tools were only supposed to serve as a Band-Aid until growth ignited. But by relying too heavily on them, Japan neglected to lay out an effective growth strategy.

On a scale of 1 to 5

ECB drops the reference to lower rates in its forward guidance -Full Text

ECB statement now published too 8 June

  • keeps asset purchase programme at €60bln pm
  • will run QE until inflation path has sustainably adjusted
  • stands ready to increase size duration of QE if needed
  • net purchases will be made alongside reinvestments

EURUSD dipped to 1.1221 on the rate hold news but found some support on the headline here as it omits guidance on rate cut.

Full statement:

At today’s meeting, which was held in Tallinn, the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.

Regarding non-standard monetary policy measures, the Governing Council confirms that the net asset purchases, at the current monthly pace of €60 billion, are intended to run 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.

The net purchases will be made alongside reinvestments of the principal payments from maturing securities purchased under the asset purchase programme. 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.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.

Watch the presser live here.

Here Are The Seven “Black Swans” SocGen Believes Could Shock Global Markets

As part of its periodic Global Economic Outlook, SocGen traditionally includes a discussion of what it views are the biggest “black swans” both to the upside and the downside, and the latest just released edition titled “On a Plateau”, which took a rather grim outlook to the world economy predicting that a US recession will likely hit in the not too distant future while “China, South Korea, Australia, US, Germany, UK and Japan are in the more mature phase of the cycle”, and that current global growth is “essentially as good as it gets”…

Six big events coming up on the economic calendar in the day ahead

1 )Japan jobs and consumers

Japan releases April jobs numbers and retail sales at 02330 GMT. Economic data in Japan still doesn’t move the market much but if the improvements from early this year can continue, a big conversation about the BOJ will have to take place. Keep a close eye on retail sales.

2) French GDP

The second look at Q1 French GDP is due at 0645 GMT. No change from the +0.3% q/q and +0.8%. An uptick would add to the optimism that we heard from Draghi earlier today.

3) German inflation

The German regional CPI numbers will begin to trickle out at 0700 GMT, starting with Saxony. After they’re all in, the national numbers will be released. However, in terms of trading, the market has it all figured out before the national number at 1200 GMT, so watch the regional figures for the trend.


This one is huge. The Fed hasn’t made up its mind about a June 14 hike and inflation is a big reason why. If PCE head and core numbers miss, there will be a major rethink about what’s coming in two weeks. The y/y deflator is expected at 1.7% with core forecast at 1.5%. The data is due at 8:30 am ET (1230 GMT)

5) Consumer confidence

Sentiment surveys have been great since the US election but it hasn’t been the best month for faith in the new administration. Could that make consumers think again? Probably not but we’ll find out when the numbers are released at 10 am ET (1400 GMT).

6) Fed’s Brainard Part 3

We heard from Brainard twice late last week but she never really dove into the monetary policy debate. At both appearances, however, she alluded to worries about soft inflation. Maybe she was just waiting to get the latest PCE data before sending a signal. We’ll find out at 1 pm ET (1700 GMT).

Moody’s downgrades China’s rating to A1 from Aa3 and changes outlook to stable from negative -Full Text

Moody’s Investors Service has today downgraded China’s long-term local currency and foreign currency issuer ratings to A1 from Aa3 and changed the outlook to stable from negative.

The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows. While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government.

The stable outlook reflects our assessment that, at the A1 rating level, risks are balanced. The erosion in China’s credit profile will be gradual and, we expect, eventually contained as reforms deepen. The strengths of its credit profile will allow the sovereign to remain resilient to negative shocks, with GDP growth likely to stay strong compared to other sovereigns, still considerable scope for policy to adapt to support the economy, and a largely closed capital account.

China’s local currency and foreign currency senior unsecured debt ratings are downgraded to A1 from Aa3. The senior unsecured foreign currency shelf rating is also downgraded to (P)A1 from (P)Aa3.

China’s local currency bond and deposit ceilings remain at Aa3. The foreign currency bond ceiling remains at Aa3. The foreign currency deposit ceiling is lowered to A1 from Aa3. China’s short-term foreign currency bond and bank deposit ceilings remain Prime-1 (P-1).