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Sat, 22nd July 2017

Anirudh Sethi Report

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Archives of “central banks” Tag

Emerging Markets: An Update

National Bank of Hungary meets Tuesday and is expected to keep policy steady.  The bank has been loosening policy quarterly via unconventional measures, which it just did at its June meeting.  Further easing is possible at the September meeting.  CPI rose only 1.9% y/y in June, the lowest since December and below the 2-4% target range.
Malaysia reports June CPI Wednesday, which is expected to rise 3.8% y/y vs. 3.9% in May.  Although the central bank does not have an explicit inflation target, falling price pressures should allow it to keep rates steady into 2018.
South Africa reports June CPI Wednesday, which is expected to rise 5.2% y/y vs. 5.4% in May.  If so, this would be the lowest rate since November 2015 and would remain in the 3-6% target range.  SARB then meets Thursday and is expected to keep rates steady at 7.0%.  However, we think the weak economy will lead the bank to start an easing cycle in H2 2017.  That leaves September 21 and November 23.
Poland reports June industrial and construction output, real retail sales, and PPI Wednesday.  Consensus for y/y readings are 3.9%, 9.8%, 6.0%, and 2.1%, respectively.  The economy remains robust, but price pressures are falling and so there is no urgency to hike rates.  CPI rose only 1.5% y/y in June, the lowest since December and at the bottom of the 1.5-3.5% target range.
Taiwan reports June export orders Thursday.  Exports and export orders have slowed a bit in recent months and so bears watching.  The mainland economy appears to be holding up well, which should be reflected in Taiwan data.

Emerging Markets: What has Changed

  • The US confirmed North Korea’s claims that it tested an intercontinental ballistic missile.
  • The Pakistani rupee was devalued, prompting a new central bank governor to be named.
  • Vietnam’s central bank cut interest rates for the first time since March 2014.
  • Egypt’s central bank surprised markets with a 200 bp hike to 18.75%.
  • South Africa’s ruling ANC reportedly proposed that SARB be state-owned.
  • Petrobras announced two separate cuts to fuel prices.

In the EM equity space as measured by MSCI, Chile (+1.9%), Hungary (+1.8%), and India (+1.7%) have outperformed this week, while Qatar (-1.4%), Hong Kong (-1.3%), and Russia (-1.1%) have underperformed.  To put this in better context, MSCI EM fell -0.8% this week while MSCI DM fell -0.4%.

In the EM local currency bond space, Argentina (10-year yield -6 bp), India (-3 bp), and Taiwan (-3 bp) have outperformed this week, while Turkey (10-year yield +27 bp), Colombia (+25 bp), and Indonesia (+21 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 8 bp to 2.39%.

In the EM FX space, EGP (+1.4% vs. USD), BRL (+0.5% vs. USD), and HUF (up 0.2% vs. EUR) have outperformed this week, while TRY (-2.9% vs. USD), RUB (-2.8% vs. USD), and ZAR (-2.6% vs. USD) have underperformed.

The US confirmed North Korea’s claims that it tested an intercontinental ballistic missile.  The US and South Korea almost immediately announced a new joint military exercise.  Although the US has indicated that all options are on the table, there does not appear to be support for military options by South Korea, Japan, Russia, or China.  

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:

RBI picks dozen for remedial steps

The RBI has trained its guns on a dozen bank accounts that are awash with bad loans for action under insolvency rules that could lead to the liquidation of the companies.

An internal committee of the Reserve Bank of India (RBI) has identified the 12 accounts that would be considered for resolution under Insolvency and Bankruptcy Code (IBC).

These accounts account for around 25 per cent of the gross non-performing assets (NPAs) of the banking system. Bad loans in the banking system are estimated at over Rs 8 lakh crore, meaning the NPAs in the 12 accounts are at over Rs 2 lakh crore.

The RBI had constituted an Internal Advisory Committee (IAC) comprising independent members of its board to advise it on cases that may come under the insolvency code.

This was part of an action plan of the central bank against bad loans under Banking Regulation (Amendment) Ordinance, 2017.

According to the ordinance, the RBI can issue directions to banks to initiate insolvency proceedings against defaulters.

Upcoming Week :Central banks in the spotlight

This week, it’s all about the central banks, and monetary policy-watchers will have their plates full with decisions on deck from the US, UK, Russia and Japan.

Here is what investors will be watching in the days ahead:

US Fed

The real focus will be on Fed chair Janet Yellen’s press conference following the meeting. She is likely to give some insight into how the Fed perceives the mixed bag of economic readings and whether that will knock the central bank off of its expected path for the year.

There could also be some adjustments on tap for the Fed’s inflation or unemployment projections in light of recent data. And, more importantly, Ms Yellen may offer some insight on the Fed’s plans for starting to reduce the size of its $4.5tn balance sheet, which bank officials have been teasing for several months now. The biggest question analysts are asking is whether that plan gets debuted at the September meeting or if central bankers would prefer to wait until December.

UBS economists offered this to help read the tea leaves next week:

Japan’s central bank nearly doubles ETF holdings in one year

The Bank of Japan has stepped up purchases of exchange-traded funds as part of its monetary easing policy, with the balance surging to 15.93 trillion yen ($144 billion) as of March 31.

The total marks an 80% rise from a year earlier and more than a sevenfold increase since the central bank kicked off its quantitative and qualitative easing — adding riskier assets to its balance sheet — in April 2013. ETF purchases have gradually increased under the unconventional policy, expanding to 6 trillion yen a year in July 2016 from 3.3 trillion yen.

 The bank apparently buys frequently on days when the stock market dips in the morning, serving to stabilize share prices.

“The BOJ’s ETF purchases help provide resistance to selling pressure against Japanese stocks,” says Rieko Otsuka of the Mizuho Research Institute.

Should the current pace of buying continue, the BOJ’s ETF holdings would reach about 30 trillion yen in about two years. The market capitalization of the Tokyo Stock Exchange’s first-section companies comes to 550 trillion yen.

The bank’s growing market presence has raised concerns about the repercussions when the easing policy eventually winds down. When speculation of a BOJ exit grows, the anticipated cutbacks on ETF purchases would accelerate selling of Japanese stocks. As a precaution against a sharp market decline, “the BOJ many need to set aside provisions,” Otsuka says.

Biggest Threats to Dollar’s Global Supremacy are at Home -FITCH

The US dollar will almost certainly remain the world’s most important
reserve currency for the foreseeable future, as no other offers the same
set of advantages to money managers, including central banks, or is as
deeply embedded in the global financial system. The primary cost to
the US is surrendered competitiveness due to dollar appreciation, but
lower interest rates and unrivalled government access to funding bestow
considerable benefits, ultimately supporting the sovereign’s ‘AAA’ rating.

As the Fed tightens, expect calls for an alternative to US dollar dominance, but no real change.

Congress is the most plausible medium-term threat.

Emerging Market :An Update

EM FX closed last week on a mixed note, with markets struggling to find a compelling investment theme. The US jobs data this week could provide some more clarity on Fed policy.  We still think markets are still underestimating political risk in the big EM countries, including Brazil (Moody’s outlook moved to negative), Mexico (election in state of Mexico), South Africa (ANC debates Zuma’s fate), and Turkey (ongoing crackdown on opposition).
 
Bank of Israel meets Monday and is expected to keep rates steady at 0.10%.  CPI rose 0.7% y/y in April, below the 1-3% target range.  With the shekel remaining firm, the central bank is likely to keep rates steady whilst continuing to buy USD/ILS.  
South Africa reports April money and private sector credit data Tuesday Both are expected to pick up modestly from March.  It reports April trade data Wednesday.  Q1 unemployment will be reported Thursday, and is expected at 27.0% vs. 26.5% in Q4.  SARB kept rates steady last week.  Next policy meeting is July 20.  If current trends persist, we think it will give a stronger signal that it could cut rates in H2.  Results of the ANC meeting are not yet known as of this writing.
Chile reports April IP Tuesday.  Central bank releases its minutes Friday, while April retail sales will also be reported.  The economy remains weak while price pressures remain low.  While the bank signaled that the easing cycle is over for now, we do not see tightening until 2018.  Next policy meeting is June 15, and rates are likely to remain steady at 2.5%.

A Problem Emerges: Central Banks Injected A Record $1 Trillion In 2017… It’s Not Enough

Two weeks ago Bank of America caused a stir when it calculated that central banks (mostly the ECB & BoJ) have bought $1 trillion of financial assets just in the first four months of 2017, which amounts to $3.6 trillion annualized, “the largest CB buying on record.” 

 

WSJ on Yellen:”indicates era of extremely stimulative monetary policy is coming to an end”

The Wall Street Journal recap of Yellen’s speech and remarks earlier today

  • Ms. Yellen said the Fed was moving away from its efforts to revive a recession-scarred economy and focusing instead on maintaining the gains of the past few years
  • That will change the central bank’s policy-making stance, she said
  • Noting that Fed officials plan to continue gradually raising interest rates unless the economy begins to deteriorate
  • The Fed’s benchmark short-term interest rate will continue to move up to its long-term average, she said.
None of which comes a surprise, Fed communication efforts in past days have been on this message.