Sat, 22nd July 2017

Anirudh Sethi Report


Archives of “Reaction rate” Tag

OIL-OPEC Secondary sources say compliance for members dropped to 92% in June

There are a few headlines about the place this morning on compliance rates

Basic gist is that ‘secondary sources’ data used by OPEC show cartel members are pumping more, with compliance with cuts for its members down to 92% in June (from 110% in May)
  • Note, news on this has been doing the rounds since last week, with various numbers bandied about (the compliance rate updated)
  • Last week compliance was being reported around 97%, so the 92% figure is a worsening
Note, secondary-sources data is from external agencies OPEC uses to assess compliance. OPEC uses two sets of figures to monitor output, those supplied by each country & the secondary sources

Why China Unexpectedly Hiked Rates 10 Hours After The Fed

As we reported on Wednesday evening, something interesting took place on Thursday morning in Beijing: in a case of eerie coordination, China tightened monetary conditions across many of the PBOC’s liquidity-providing conduits just 10 hours after the Fed raised its own interest rate by 0.25% for only the third time in a decade.

The oddly matched rate hikes, prompted Bloomberg to think back to the mysterious “Shanghai Accord” of February 2016, which took place during the peak days of last year’s global capital markets crisis, and whose closed-door decisions – to this day kept away from the public – prompted the market rally that continues to this day. As Bloomberg wrote, the coordinated “response suggests that pledges by the Group of 20 economies a little over a year ago in Shanghai to “carefully calibrate and clearly communicate” policies may not have been hollow after all.”

That said, it was not the first time the People’s Bank of China has acted on the heels of a Fed move. At the peak of the financial crisis, the PBOC cut lending rates after six of its counterparts, including the Fed, had announced a simultaneous rate cut. That October 2008 move enhanced China’s emerging reputation as a global player on the international economic-policy circuit. “Growth divergence is morphing into growth synchronization,” said Chua Hak Bin, a Singapore-based senior economist with Maybank. “Policy divergence was also a narrative for those expecting a strong dollar, but that is moving now to policy synchronization.”

Coordinated or not, as of last night financial conditions in China, like in the US, have become incrementally tighter even if both the Chinese and US stock markets failed to respond accordingly.

Quick-take ECB previews from 6 banks

The European Central Bank meet Thursday, some really quick preview action from a few banks

Announcement due 1245GMT, along with President Draghi’s press conference
  • Main financing rate currently at 0%, expected to be left unchanged
  • Marginal lending facility rate currently at 0.25%, expected unchanged
  • Deposit facility rate currently at -0.4% and expected 9go on, have a guess) to be left unchanged
Bank of America / Merrill Lynch:
  • The truce between hawks & doves will be reflected in a dovish Draghi
  • Draghi will use extended QE as intended
  • Expect that policy likely to be unchanged
  • Watching for any sign forward guidance on rates could be dampened
  • Despite likely much higher 2017 HICP they see no change to rates, nor to the size of QE, nor to forward guidance
  • Perhaps the balance of risks changes to neutral
  • European Central Bank is in a holding mode, assessing incoming data
  • Will be no change to policy or statement
  • September will bring tapering announcement

People’s Bank of China sets yuan reference rate at 6.9526 (vs. yesterday at 6.9498)

CNY mid rate for the day, little bit weaker for the yuan

Open  market operations (OMOs):
  • inject  10bn yuan via 7-day reverse repos
  • inject  10bn yuan via 14-day reverse repos
Small injections (which mean today is a net drain); watch for more stress in HK yuan borrowing markets today. Yesterday saw surging rates for overnight (and longer) yuan borrowing. Likely we’ll see the same again today.
By limiting injections into money markets the People’s Bank of China makes borrowing yuan more expensive and therefore shorting yuan more expensive. The PBOC is trying to discourage yuan shorts. 

Top 5 Events for Coming Week

Now that the US employment report is behind us, the new trading week will be dominated by central bank decisions (no the Fed decision is not one of them but it will be anticipated on Dec 14th).

  1. ECB interest rate decision.  Thursday December 8th at 7:45 AM ET/1245 GMT.  The ECB is expected to keep their interest rates unchanged. However, they are expected to   announce an extension of the QE program.  ECB’s Draghi will have his usual press conference starting at 8:30 AM ET,  1330 GMT.  You can expect that press conference to last one hour.
  2. RBA interest rate decision. Monday December 5 at 10:30 PM ET/Tuesday December 6 at 0330 GMT.  The Reserve Bank of Australia is expected to keep the rates unchanged at 1.5%. There has been more chatter recently, that the RBA may look to tighten in 2017. Goldman Sach recently said this, as did the OECD.  However, Morgan Stanley was out with their trade recommendations that focused on shorting the AUD (see post here). So there is debate.  The decision and statement will be eyed for any change in sentiment.  The RBA last changed rates in July.
  3. BOC interest rate decision.  Wednesday, December 7th at 10 AM ET/1500 GMT. The Bank of Canada is expected to keep rates unchanged at 0.5%.  Today the Canada employment report showed job gains of 10.7K vs -15K est.  However, it was concentrated in part time jobs for the second consecutive month.  The unemployment rate did fall to 6.8% from 7% (equaled the low for the year from June).  This week, Gov. Poloz spoke cautiously saying:
  • All things being equal,  need to have bigger shock when you’re in such a zone of uncertainty to prompt a move
  • At this stage too early to tell impact of Trump election; BOC won’t react to hypotheticals.
  • Big shock or accumulation of things, could change path
  • Canada has gone through downsizing phase and resources
  • Most of bad news for resources behind Canada
  • Capability may be more important than output gap
  • Uncertainty from Trumps victory
  • BOC does not make assumptions about US government policy
  • We have all the ingredients of divergence in monetary policy with US
  • If we hadn’t had oil price shock Canada and US economies will be in more similar situations
  • Bond yields have crept up in last few weeks.. That is something we have to build into calculus going forward
  • Sales by Canadian owned foreign affiliates  are about the same size as total exports every year
  • Canada will set independent policy
    4.  Australia GDP QoQ. Tuesday December 6 at 7:30 PM ET/0030 GMT (Wednesday).  The eestimate is for a gain of 0.2% vs +0.5%  in Q2. The YoY is expected to rise by 2.5% vs 3.3% last.

Former BOJ board member Shirai favours rate cuts over bond buys

Former BOJ board member Shirai out on Bloomberg 20 Sept

  • chances high that BOJ chooses rate cut over more bond buys
  • cutting rates has smaller costs than asset purchases
  • expects asset purchases to get harder for BOJ to make
  • better for BOJ not to make monetary base target a range
  • its not right for a central bank to make target value
  • BOJ should target 1% inflation first
  • inevitable for BOJ to delay timing of hitting CPI goal
  • hard for foreign bonds to be accepted as BOJ tool

Will they, won’t they? Less than 24 hours before we find out.

USDJPY has a little dip lower into 101.75 in a general retreat from 102.00. Nikkei down -0.21%


MNI sources reporting that ECB likely to keep rates on hold until at least year-end

MNI running a report from their ECB sources 19 Sept

Story is helping to put a bid under the euro again

  • sources suggest ECB may turn out to have done enough already
  • QE unlikely to come to an abrupt end next March
  • may need to adjust parameters of QE programme
  • sources reject helicopter money or additional asset classes
  • no one interested in taking ECB depo rate lower
  • clear view still to fulfil ECB QE programme

Nothing exactly outrageous in the comments but these markets/algos are quick to feed off any swill thrown in the trough.

EURUSD posts 1.1168  while EURGBP spikes to 0.8557 capping cable and pushing it down to 1.3050

Fixed deposit rate likely to plunge below 7 % soon

Below 7 per cent interest rate for one year retail fixed deposits seem to be a reality in the near future while domestic bulk term deposit of rupees one crore and above) it is already 6.75 per cent with effect from April 27, 2016.

Country’s largest bank State Bank of India has revised one year domestic term deposit rate to 7.15 per cent for deposits below Rs 1 crore with effect from September 1, 2016.

A SBI official confirmed the rate revision to Financial Chronicle.

Interest rates for bank fixed deposits have come down sharply from 9 to 10 per cent offered a couple of years back.

Most mainstream banks are today offering interest rates of 8 per cent or less, only co-operative banks are offering higher rates, said a financial planner.

SBI revised downward the interest rate of retail term deposits for 1 year to 3 year period with effect from September 1, 2016 to 7.15 per cent from 7.25 per cent for 1 year to 455 day period; 7.25 per cent from 7.50 per cent for 465 days to 2 year period and also 7.25 per cent from 7.50 per cent for 2 year to less than 3 year period.

The bank kept the retail term deposit rates unchanged for 7 to 45 days at 5.50 per cent; 46 to 79 days at 6.50 per cent; 180 to 210 days at 6.75 per cent and 211 days to less than a year at 7 per cent.

The retail term deposit rate for 3 to 5 years and 5 years to 10 years were also kept unchanged at 7 per cent and for senior citizens those more than 65 year old at 7.25 per cent.

SBI also revised the fixed deposit rates for the senior citizens for these three tenures with effective rates from September 1 being 7.40 per cent from 7.50 per cent for 1 year to 455 day period, 7.50 per cent from 7.75 per cent for 465 days to 2 year period and also 7.50 per cent from 7.75 per cent for 2 year to less than 3 year period.

Bank Of America Admits The U.S. May Already Be In A Recession

Almost one year ago, in March 2015, we explained how “The Fed’s Artificial Steepening Of The Yield Curve” has resulted in many unexpected consequences, the most important of which has been the erroneous interpretation of the yield curve as a leading recessionary signal. As said back then, “the artificially steep yield curve is a reflection of policy intent not economic reality…. Where the yield curve in the all-important belly of the 5s10s might have deeply inverted in the past just prior to recession, there is no justification to expect the same attainment of absolute levels where artificial monetary intrusion has pushed the curve much, much steeper.”

One week ago, it was as if a light bulb went off over Wall Street’s head, when first Deutsche Bank’s Dominic Konstam realized the significance of the above excerpt, and admitted that far from the 4% recession odds that the Fed’s hopeless FRB/US DSGE computer model spews out when looking at the “normal” yield curve, when normalizing for the Fed’s intervention odds of a recession in the next 12 months soar to 50%! 

In a special report published earlier this week, we noted that today’s near-zero interest rate regime does not allow the yield curve to freely invert or even flatten too much because of certain structural limits. For example, liabilities-driven investors who in the past could receive long rates below the fed funds rate can no longer do so once rates are floored at zero. Investment fund managers are also restricted by mandates from buying negative yielding assets that lead to mark-to-market losses on their portfolios. Pension investors, who must target returns based on liability assumptions, have been driven into high yielding non-core rate assets as their discount rates are stubbornly and unrealistically high compared to Treasury yields. These factors keep the curve artificially steep even though both short and long rates have been clearly trending downward over the years.

Fed’s Lockhart: Rate hike in Oct or Dec likely appropriate

Hawkish comments from Lockhart:

  • Economic data mixed, ‘a touch more downside risk’ in recent weeks
  • Liftoff decision hinges on incoming data, especially consumer activity
  • Sees rates liftoff relatively soon
  • Still expects inflation to rebound in medium term as transitory factors fade

His comments were released about 10 minutes before they were scheduled. Lockhart was also hawkish before the Sept FOMC so he’s not the best barometer and he hedges pretty hard by pointing to incoming data.