Sat, 22nd July 2017

Anirudh Sethi Report


Archives of “monetary policy” Tag

Dollar Tumbles, Euro Soars After Obamacare Repeal Dies; China Intervenes To Halt Rout

  • The USD-index dropped to 10 month lows amid fading hopes of US reforms after Obamacare repeal effectively died last night.
  • Soft CPI from the UK and NZ weigh on both currencies
  • Looking ahead, highlights include BoE’s Carney and the API Crude report

The Dollar Index sank to its lowest level since September, a fresh 10-month low, after two more Republican defections on Monday night doomed the proposed GOP healthcare plan in the Senate. And while Treasuries rose on concerns about inflationary pressures and the viability of the Trump stimulus agenda, S&P futures rebounded gingerly from session lows, and were up 0.01% after posting nominal declines earlier in kneejerk reaction to the Senate news.




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.

All Eyes on ECB

The focus shifts in the week ahead from Yellen’s testimony and disappointing data to the ECB meeting which is expected to result in a further modest adjustment in its risk assessment.  While the focus shifts, the pressure on the dollar will likely remain.  It fell to new lows for the year last week against the euro, sterling, Swedish krona, and the Canadian and Australian dollars, among the majors.   
Among the emerging market currencies, the dollar fell to new lows for the year against the central European currencies (forint, zloty, and koruna) as well as the Singapore dollar and Mexican peso, among the actively traded emerging markets.  The dollar recorded its lowest close for the year against the Chinese yuan ahead of the weekend.   
The markets have doubted the Fed’s commitment to raising interest rates since the start of the year.  Perhaps it reflected, in part, the disappointment after the dot plots had suggested four hikes in 2016, only one was delivered.  The markets were skeptical of the March hike until officials launched a full court press to convince it otherwise.   Officials needed less of a campaign about the June hike.  It is a possible third hike this year that the market is now skeptical  
On June 15, a day after the last FOMC meeting, the September Fed funds futures contract implied about an 18% chance of a hike, according to the CME.  It had fallen a little below 10% before the retail sales and CPI reports before the weekend.  There is now almost an 8% chance of a hike priced into the September futures contracts.  
The market is skeptical of a December move but less so than after the June hike.   A month ago, the market had discounted about a 41% chance of a hike.  The pricing implied a 47% chance before pre-weekend data, which spurred a reassessment that brought the odds down to almost 43%.  

Tokyo Election Comes at a Rough Time for Abe

Tired of the seemingly endless political drama in the US and Europe?  Try Japan.  Tokyo’s metropolitan 127-seat Assembly is up for election on July 2. 
 It could not come at a worse time for Prime Minister Abe and his Liberal Democrat Party.  In some ways, Abe and the LDP are victims of their ownsuccess.  Recall that previously, there had seemed to be an almost revolving door at the head of government when the DPJ held the reins.  Abe is completing his second term, and the price of such political stability is corruption–several scandals and accusations of misconduct. 
On top of this, there has been some backlash against the way that the LDP has pushed through legislation.  Some of the legislation is controversial, as the recent conspiracy measure, and the method of passage was critical for being harsh.     The net result has been an erosion of support for the LDP-led government. 
Tokyo is such a large and important city; it has a governor rather than a mayor.  The current governor of Tokyo is a Yuriko Koike, who previously in the LDP, though not part of the inner clique, and recently bolted to taking the helm of a new Japanese political party, Tomin First no Kai (Tokyoites First), is popular and is seen as a potential successor of Abe.  Although her handling of the fish market (Tsukiji) relocation disappointed many, according to reports, her popularity remains strong.   The mayoral candidate she backed in Chiyoda won recently.  Currently, the party has six seats in the assembly and is projected to increase its representation toward 40-45 seats. 

$1tn in dollar exposure has Japanese banks in deep water

Japanese banks are pursuing a dangerous strategy of loading up on foreign assets with money borrowed from overseas, a global banking watchdog has warned.

Their net holdings of dollar assets have doubled to about $1 trillion since before the Lehman shock in 2008, according to data released this week by the Bank for International Settlements.

 The amount is the difference between their holdings of dollar assets, worth about $3.5 trillion, and their dollar liabilities, around $2.5 trillion.

Their net holdings could be even bigger if assets denominated in other currencies, such as the euro, are included.

Following the stress test results, the banks like the banks (buyback bonanza)

The Federal Reserve says all 34 banks passed the stress tests and approved plans to use extra capital for stock buybacks and boosts to dividends.

Since that announcement its been a bit of a scramble from the banks to announce dividend and buyback hikes …
Bank of America:
  • Plans to buy back $12bn of shares
  • To buy back up to $15.6bn in shares (huge buyback)
  • Jack up the dividend to 32c/share
JP Morgan
  • To buy back up to $19.4bn in shares (huge buyback – largest ever)
  • Divvy boost to 56c/share

Morgan Stanley:

  • $5bn share buyback
  • Divvy hike by 25% (from 20 cents to 25 cents)

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: