In Portfolioticker today
- Today at the stock market
- The portfolio today
- Energy: Oil and Gas Futures
- AU: Retail Trade. Jan 2018
- AU: Balance of Payments and International Investment Position. Dec 2017
- AU: Monetary Policy Decision
- US: Manufacturers Shipments Inventories and Orders. Jan 2018
- Japan Update
- China Update
Today at the stock market
“U.S. stocks eked out a small gain on Tuesday after a choppy session as investors worried about the prospects of a trade war due to mixed signals from Washington on whether U.S. President Donald Trump would follow through with proposed tariffs.
Trump reiterated his plan to slap hefty import tariffs on steel and aluminum saying “trade wars aren’t so bad” even as lawmakers such as Senate Majority Leader Mitch McConnell stepped up calls to scrap the proposal.
Earlier in the day strategists said some investors were beginning to bet Trump would not follow through on the proposal, which they saw as a negotiating tactic in trade talks. But gains were limited by the uncertainty throughout the day.
“The market doesn’t want to hear the uncertainty, the market wants to hear one way or another,” said Chris Zaccarelli, Chief Investment Officer at Independent Advisor Alliance in Charlotte, North Carolina.
“If our worst fears are confirmed … the market should have even greater losses than what we saw last week. Likewise if it seems we’re not going to have a trade war the market should go higher.”
Jonathan Mackay, investment strategist at Schroders Investment Management in New York, said there are “no winners in a trade war.”
“The market is basically grasping for straws around what the (tariff) policy is going to be. Based on the action we saw today it’s hoping it doesn’t turn into a trade war,” he said.
Investors were also eyeing news that North Korea was open to the possibility of talks with the United States on denuclearization.
“North Korea helps around the margin,” said Mackay.
Most of the S&P’s 11 sectors rose, with the materials index leading the gainers with a 1.1% increase as investors in that sector bet against a trade war, according to Independent Advisor Alliance’s Zaccarelli.
Utilities was the biggest faller, with a 1.4% drop.
Among the bigger movers of the day, Target fell 4.5% after the big-box retailer reported lower-than-expected profit for the holiday quarter.
Qualcomm dropped 2.9% after a U.S. government national security panel said it identified potential risks that warrant a full investigation of Broadcom Ltd’s $117-billion bid for the chipmaker.” Reuters
^ Market indices today (mouseover for 12 month view) Chart: Google Finance
|Index||Ticker||Today||Change||31 Dec 17||YTD|
|S&P 500||SPX (INX)||2,728.12||+0.26%||2,238.83||+2.03%|
^ USD and AUD denominated indices over the past 52 weeks Chart: Bunting
|Index||Currency||Today||Change||31 Dec 17||YTD|
Portfolio stock prices
Amazon closed on a record high of $1,537.64, up +0.92% on yesterday’s record of $1,523.61.
|Stock||Ticker||Today||Change||31 Dec 17||YTD|
^ Bloomberg Dollar Spot Index (DXY) movements today (mouseover for 12 month view) Chart: Bloomberg
“The Bloomberg Dollar Spot Index (DXY) fell 0.4%.
The EUR rose 0.6% to USD 1.2408.
Britain’s GBP rose 0.3% to USD 1.3892.
Japan’s JPY was flat at 106.18 per USD.
The yield on 10-year Treasuries was steady at 2.88%.
Australia’s 10-year yield held at 2.82%.” Bloomberg
^ AUD movements against the USD today (mouseover for 12 month view) Chart: xe.com
Oil and Gas Futures
Prices are as at 15:49 ET
- NYMEX West Texas Intermediate (WTI): $62.48/barrel -0.14% Chart
- ICE (London) Brent North Sea Crude: $65.69/barrel +0.23% Chart
- NYMEX Natural gas futures: $2.76/MMBTU +1.89% Chart
AU: Retail Trade. Jan 2018
Press Release Extract [au_retail]
Australian retail turnover rose 0.1 per cent in January 2018, seasonally adjusted, according to the latest Australian Bureau of Statistics (ABS) Retail Trade figures. This follows a 0.5 per cent fall in December 2017.
“There were offsetting movements by industry with rises in other retailing (1.0 per cent), household goods retailing (0.1 per cent), and cafes, restaurants and takeaways (0.1 per cent) being offset by falls in clothing, footwear and personal accessories (-0.7 per cent) and department stores (-0.6 percent),” Ben James, Director of Quarterly Economy Wide Surveys at the ABS, said. “Food retailing was relatively unchanged (0.0 per cent).”
In seasonally adjusted terms, there were rises in Queensland (0.4 per cent), Victoria (0.3 per cent), Western Australia (0.3 per cent), and Tasmania (0.3 per cent). The Australian Capital Territory was relatively unchanged (0.0 per cent). New South Wales (-0.2 per cent), South Australia (-0.6 per cent), and the Northern Territory (-0.5 per cent) fell in seasonally adjusted terms.
The trend estimate for Australian retail turnover rose 0.3 per cent in January 2018 following a rise (0.3 per cent) in December 2017. Compared to January 2017, the trend estimate rose 2.3 per cent.
Online retail turnover contributed 4.7 per cent to total retail turnover in original terms in January 2018. In January 2017, online retail turnover contributed 3.6 per cent to total retail.”
Australian Bureau of Statistics, “8501.0 Retail Trade. Jan 2018“, 6 Mar 2018 (11:30 AEDT) More
AU: Balance of Payments and International Investment Position. Dec 2017
Press Release Extract [au_bop]
Increased goods imports, flat goods exports and a widening net primary income deficit were the main contributors to the current account deficit increase in the December quarter 2017, according to latest figures from the Australian Bureau of Statistics (ABS).
The seasonally adjusted current account deficit rose $3,011 million to $14,024 million in the December quarter 2017. In seasonally adjusted terms, the balance on goods and services deficit in the December quarter 2017 was $117 million, a turnaround of $2,094 million from a surplus of $1,977 million in the September quarter 2017. Imports of goods and services rose $1,953 million and exports of goods and services fell $140 million. The net primary income deficit widened $899m in the December quarter 2017.
In volume terms, exports fell and imports rose this quarter, and as a result international trade is expected to detract 0.5 percentage points from growth in the December quarter 2017 Gross Domestic Product. In seasonally adjusted chain volume terms, the balance on goods and services deficit increased $2,064 million to a deficit of $13,081 million.
Australia’s net international investment position was a liability of $986.2 billion at 31 December 2017, an increase of $27.8 billion (3 per cent) on the revised 30 September 2017 position of $958.4 billion.
Australia’s net foreign debt liability position increased $19.6 billion (2 per cent) to $1,010.0 billion. Australia’s net foreign equity asset position decreased $8.3 billion (26 per cent) to $23.8 billion at 31 December 2017.”
Australian Bureau of Statistics, “5302.0 Balance of Payments and International Investment Position. Dec 2017“, 6 Mar 2018 More
AU: Monetary Policy Decision
Press Release Extract [eu_au_rba]
[Same text as last month]
At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.
The global economy has strengthened over the past year. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. Growth picked up in the Asian economies in 2017, partly supported by increased international trade. The Chinese economy continues to grow solidly, with the authorities paying increased attention to the risks in the financial sector and the sustainability of growth.
The pick-up in the global economy has contributed to a rise in oil and other commodity prices over the past year. Even so, Australia’s terms of trade are expected to decline over the next few years, but remain at a relatively high level.
Globally, inflation remains low, although higher commodity prices and tight labour markets are likely to see inflation increase over the next couple of years. Long-term bond yields have risen but are still low. Market volatility has increased from the very low levels of last year. As conditions have improved in the global economy, a number of central banks have withdrawn some monetary stimulus. Financial conditions remain expansionary, with credit spreads narrow.
The Bank’s central forecast is for the Australian economy to grow faster in 2018 than it did in 2017. Business conditions are positive and non-mining business investment is increasing. Higher levels of public infrastructure investment are also supporting the economy. Further growth in exports is expected after temporary weakness at the end of 2017. One continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high.
Employment grew strongly over the past year and the unemployment rate declined. Employment has been rising in all states and has been accompanied by a significant rise in labour force participation. The various forward-looking indicators continue to point to solid growth in employment over the period ahead, with a further gradual reduction in the unemployment rate expected. Notwithstanding the improving labour market, wage growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wage growth over time. Consistent with this, the rate of wage growth appears to have troughed and there are reports that some employers are finding it more difficult to hire workers with the necessary skills.
Inflation remains low, with both CPI and underlying inflation running a little below 2 per cent. Inflation is likely to remain low for some time, reflecting low growth in labour costs and strong competition in retailing. A gradual pick-up in inflation is, however, expected as the economy strengthens. The central forecast is for CPI inflation to be a bit above 2 per cent in 2018.
On a trade-weighted basis, the Australian dollar remains within the range that it has been in over the past two years. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.
The housing markets in Sydney and Melbourne have slowed. Nationwide measures of housing prices are little changed over the past six months, with prices having recorded falls in some areas. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. APRA’s supervisory measures and tighter credit standards have been helpful in containing the build-up of risk in household balance sheets, although the level of household debt remains high.
The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”
Reserve Bank of Australia, “Monetary Policy Decision“, 6 Mar 2018 More
US: Manufacturers Shipments Inventories and Orders. Jan 2018
Press Release Extract [us_activity]
New orders for manufactured goods in January, down following five consecutive monthly increases, decreased $6.9 billion or 1.4 percent to $491.7 billion, the U.S. Census Bureau reported today. This followed a 1.8 percent December increase. Shipments, up thirteen of the last fourteen months, increased $2.8 billion or 0.6 percent to $498.8 billion. This followed a 0.7 percent December increase. Unfilled orders, down following four consecutive monthly increases, decreased $2.9 billion or 0.3 percent to $1,141.2 billion. This followed a 0.6 percent December increase. The unfilled orders-to-shipments ratio was 6.54, down from 6.58 in December. Inventories, up fourteen of the last fifteen months, increased $2.1 billion or 0.3 percent to $672.4 billion. This followed a 0.7 percent December increase. The inventories-to- shipments ratio was 1.35, unchanged from December.
New orders for manufactured durable goods in January, down following two consecutive monthly increases, decreased $9.0 billion or 3.6 percent to $240.0 billion, up from the previously published 3.7 percent decrease. This followed a 2.7 percent December increase. Transportation equipment, also down following two consecutive monthly increases, led the decrease, $8.6 billion or 10.0 percent to $77.9 billion. New orders for manufactured nondurable goods increased $2.1 billion or 0.8 percent to $251.7 billion.
Shipments of manufactured durable goods in January, up eight of the last nine months, increased $0.7 billion or 0.3 percent to $247.1 billion, up from the previously published 0.2 percent increase. This followed a 0.5 percent December increase. Transportation equipment, up two of the last three months, led the increase, $0.6 billion or 0.7 percent to $81.5 billion. Shipments of manufactured nondurable goods, up nine of the last ten months, increased $2.1 billion or 0.8 percent to $251.7 billion. This followed a 0.9 percent December increase. Petroleum and coal products, up seven consecutive months, led the increase, $1.8 billion or 3.5 percent to $52.5 billion.
Unfilled orders for manufactured durable goods in January, down following four consecutive monthly increases, decreased $2.9 billion or 0.3 percent to $1,141.2 billion, unchanged from the previously published decrease. This followed a 0.6 percent December increase. Transportation equipment, down three of the last four months, drove the decrease, $3.6 billion or 0.5 percent to $771.9 billion.
Inventories of manufactured durable goods in January, up eighteen of the last nineteen months, increased $1.3 billion or 0.3 percent to $408.8 billion, unchanged from the previously published increase. This followed a 0.5 percent December increase. Transportation equipment, up two consecutive months, led the increase, $0.7 billion or 0.6 percent to $131.9 billion. Inventories of manufactured nondurable goods, up eight consecutive months, increased $0.7 billion or 0.3 percent to $263.6 billion. This followed a 0.9 percent December increase. Petroleum and coal products, up seven consecutive months, drove the increase, $0.7 billion or 1.7 percent to $42.4 billion. By stage of fabrication, January materials and supplies increased 0.4 percent in durable goods and decreased 0.1 percent in nondurable goods. Work in process increased 0.5 percent in durable goods and was virtually unchanged in nondurable goods. Finished goods were virtually unchanged in durable goods and increased 0.7 percent in nondurable goods.”
US Census Bureau, “Monthly Full Report On Manufacturers Shipments Inventories and Orders. Jan 2018“, 6 Mar 2018 (10:00) More
Analysis and Comment: Reuters
“New orders for U.S.-made goods recorded their biggest decline in 6 months in Jan 2018 and business spending on equipment appeared to be slowing after strong growth in 2017.
Factory goods orders fell 1.4% amid a broad decrease in demand, the Commerce Department said on Tuesday. That was the largest drop since Jul 2017 and followed 5 straight monthly increases. Factory orders rose 1.8% in Dec 2017.
January’s drop in orders was broadly in line with economists’ expectations. Orders surged 8.4% on a year-on-year basis.
Orders for non-defense capital goods excluding aircraft, which are seen as a measure of business spending plans, fell 0.3% in Jan 2018 instead of declining 0.2% as reported last month. Orders for these so-called core capital goods decreased 0.5% in Dec 2017.
That was the first back-to-back drop since May 2016. Shipments of core capital goods, which are used to calculate business equipment spending in the GDP report, slipped 0.1% in Jan 2018 instead of edging up 0.1% as reported last month. Core capital goods shipments increased 0.7% in Dec 2017.
Prices of U.S. Treasuries rose after the data, while Bloomberg’s Dollar Spot Index (DXY) held at lower levels against a basket of currencies. U.S. stock indexes were trading slightly higher.
Business spending on equipment is cooling after growing by a robust 4.8% in 2017.
But it is likely to remain supported as companies are expected to use some of their windfall from a $1.5 trillion tax cut package to buy machinery and other equipment as they seek to boost sluggish productivity.
The Trump administration slashed the corporate income tax rate to 21% from 35% effective in Jan 2018. The tax cuts, a weakening USD and strengthening global economy are expected to support manufacturing, which makes up about 12% of the U.S. economy.
Sentiment among manufacturers remains bullish. A survey last week showed a measure of factory activity rose in February to its highest level since May 2004. But supply constraints and labor shortages are emerging, which could hurt factory output.
In Jan 2018, orders for transportation equipment dropped 10.0%, weighed down by a 28.4% plunge in the volatile orders for civilian aircraft.
Orders for machinery dropped 0.4%, the biggest decline since Oct 2016, after rising 0.6% in Dec 2017. Orders for mining, oil field and gas field machinery tumbled 8.9% after increasing 5.0% in Dec 2017. Orders for motor vehicles fell 0.5%, reversing a 0.4% gain in Dec 2017.
There were also declines in orders for primary metals and electrical equipment, appliances and components. But orders for computers and electronic products orders rose 0.5%.
Pointing to a slowdown in manufacturing, unfilled orders at factories fell 0.3% in Jan 2018. That was the biggest drop in 6 months and followed 4 consecutive monthly increases. Manufacturing inventories increased 0.3%. They have risen in 14 of the last 15 months.
Shipments of factory goods increased 0.6% in Jan 2018 after advancing 0.7% in Dec 2017. The inventories-to-shipments ratio was unchanged at 1.35.” Reuters
Outlook for Monetary Policy: Reuters
“When Bank of Japan Governor Haruhiko Kuroda spooked markets last week with talk of winding down the bank’s crisis-mode stimulus, he was describing a goal on the distant horizon – not warning of an imminent shift, say sources familiar with his thinking.
But they say starting discussion of an exit from ultra-loose policy is seen as crucial given the rising cost of easing and the need to give Japanese policymakers some ammunition in case there is another crisis.
Kuroda’s comments – and those of a future deputy – show how the central bank is softening up investor opinion in advance of what will be one of the priorities of his second term as bank governor.
“It’s a tricky process that could take years,” said one of the sources familiar with the central bank’s thinking. “The timing of an actual lift-off really depends on how inflation performs.”
To underscore that the central bank is in no rush to dial back stimulus, Kuroda said his top priority would be to meet his 2% inflation target, noting that current inflation, at 0.9% in Jan 2018, remained far from that goal.
The bank must also balance how its moves will be viewed domestically versus globally.
Japanese investors saw Kuroda’s remarks as stating the obvious and barely reacted. Overseas investors reacted more strongly, selling bonds and buying yen as they speculated stimulus would end sooner rather than later.
The Bank of Japan is already well into what analysts call “stealth tapering” as it slows annual bond buying to nearly half the pace it loosely pledges.
“The biggest challenge Kuroda faces in his second term is how to unwind the unconventional steps he took in the first five years,” said Takahide Kiuchi, who served at the BOJ board until Jul 2017.
The JPY and Japanese bond yields spiked on Friday when Kuroda told parliament there was “no doubt” the BOJ would “consider and debate” an exit if inflation hits his target during the fiscal year that runs from Apr 2019 to Mar 2020.
Masayoshi Amamiya, slated to become one of Kuroda’s 2 deputies this month, echoed those comments on Monday. “If the time comes, we’re quite capable technically to gradually and stably adjust interest rates while ensuring markets remain stable,” he told parliament during a confirmation hearing.
The sources warn against reading too much into those remarks, noting that the threshold for even debating an exit remains high.
Although the central bank’s board predicts inflation will hit 2% during fiscal 2019, a Reuters poll showed market economists expect inflation to stay at half that level.
Fears of triggering an unwelcome JPY rise that could dent Japan’s export-reliant recovery will also shape how the bank discusses an exit strategy.
“If inflation indeed reaches 2 percent, it’s feasible to at least debate an exit. That’s different from saying the BOJ will proceed with an exit immediately,” said a second source who, like the others interviewed for this article, declined to be identified because he was not authorized to speak to the media.
But waiting too long could leave the Bank of Japan with few tools to deal with a future recession.
After 3 years of heavy asset buying failed to ignite inflation, the bank in 2016 revamped its policy framework to focus on interest rates.
The result was short-term rates below zero, at minus 0.1%, and a 10-year government bond yield around 0%.
The central bank still buys bonds at an annual pace of roughly JPY 50 trillion (USD 471.56 billion). It has scooped up 40% of the JPY 980 trillion Japanese government bond market, roughly the same percentage held by private Japanese banks.
But inflation has remained stubbornly low.
Among the few remaining options would be a further rate cut, though many analysts say such a step would do little to spur growth and could backfire by hurting already-thin bank margins.
“Financial institutions are seeing their profits hit, so the BOJ should abandon negative rates,” opposition lawmaker Akio Fukuda told Amamiya in the confirmation hearing on Monday. “I fear we’ll face a terrible situation unless the BOJ heads toward an exit quickly.”
Kuroda said last week the bank’s future policy would take into account growing calls from the public for a credible exit strategy and the impact of its policy on the country’s banking system.
He has said the central bank could also raise its yield target before inflation hits 2%, which the bank could present as fine-tuning of stimulus efforts rather than the start of a full-blown policy tightening.
“Kuroda no longer says it’s premature to debate an exit. This is a clear change,” a third source said.
The sources say additional groundwork for the exit could be as subtle as different word choices and changes in tone by central bank policymakers.
But there is uncertainty whether markets would respond to such subtle messages as hoped, posing a huge communication challenge for Kuroda as he heads into his second 5-year term in Apr 2018.
“Kuroda is already softening his stance by allowing bond purchases to slow. He’s effectively already normalizing policy,” said Kiuchi, the former Bank of Japan board member.” Reuters
^ JPY movements against the USD over the past month (mouseover for inverse) Chart: xe.com
Stockmarket: Nikkei 225
^ Nikkei 225 movements over the past week Chart: Google Finance
Outlook for Monetary Policy: Bloomberg
“China stepped up its push to curb financial risk, cutting its budget deficit target for the first time since 2012 and setting a growth goal of around 6.5% that omitted last year’s aim for a faster pace if possible.
The deficit target — released Monday as Premier Li Keqiang delivered his annual report to the National People’s Congress in Beijing — was lowered to 2.6% of GDP from 3% in the past 2 years. The 6.5% goal is consistent with President Xi Jinping’s promise to deliver a “moderately prosperous” society by 2020.
Policy makers dropped a target for M2 money supply growth, saying it’s expected to expand at similar pace to last year. Authorities reiterated prior language saying prudent monetary policy will remain neutral this year and that they’ll ensure liquidity at a reasonable and stable level.
Xi has ratcheted up his drive to curb debt risk, pollution and poverty at a time when the world’s second-largest economy is on a long-term growth slowdown. His efforts to rein in spending contrast with an historic expansion of U.S. borrowing under Donald Trump during a period of economic expansion.
The 2018 targets “suggest slower growth and a fiscal drag,” said Callum Henderson, a managing director for Asia-Pacific at Eurasia Group in Singapore. “This makes sense for China in the context of the new focus on financial de-risking, poverty alleviation and environmental clean-up, but is less good news at the margin for those economies that have high export exposure to China.”
Growth handily surpassed 2017’s target with a 6.9% expansion that was the first acceleration since 2010. Economists forecast a moderation to 6.5% this year amid the ongoing deleveraging drive and trade tensions with the Trump administration and a further deceleration to 6.2% in 2019.
“We will improve the transmission mechanism of monetary policy, make better use of differentiated reserve ratio and credit policies, and encourage more funds to flow toward small and micro businesses, agriculture, rural areas, and rural residents, and poor areas, and to better serve the real economy,” Li said in his report.
Spending to curb pollution will rise 19% to 40.5 billion as authorities strive to make greater progress on one of their key objectives, Li said. Authorities aim to cut sulfur dioxide and nitrogen oxide emissions by 3% and keep reducing smog in key areas. Days with heavy air pollution in key cities have fallen 50% over the past 5 years, according to the work report.
The lower fiscal budget deficit ratio goal should be seen in the context of the government’s awareness of the risk to systemic stability amid the deleveraging drive, said Pauline Loong, managing director at research firm Asia-Analytica in Hong Kong. “The work report this year is focused throughout on risk management.”
Growth will be supported by CNY 800 billion of tax cuts for enterprises and individuals, while use of special purpose bonds will prioritize “supporting ongoing local projects to see them make steady progress,” the Finance Ministry said.
Still, the augmented fiscal deficit, which includes local government financing vehicles and other off-balance-sheet activities, will remain expansionary at about 10% of GDP this year, estimates Liu Li-gang, chief China economist at Citigroup Inc. in Hong Kong. That’s down from the International Monetary Fund’s estimate of 12.6% last year.
“The recent pace of fiscal stimulus is unsustainable and unnecessary,” said Stephen Jen, chief executive officer of Eurizon SLJ Capital Ltd. in London. “A curtailment in the official fiscal and growth target makes sense.”
Other key economic objectives included:
- Retail sales growth of about 10%
- Consumer prices will rise about 3%, the same as last year’s ceiling
- Creation of 11 million new urban jobs, the same as last year
- CNY exchange rate to remain stable at an equilibrium level
- The report also said that an increase in the thresholds for personal income taxes was planned.
Officials also said they will study setting up a national financial institution to help fund housing projects. China also aims to set a development plan for the Pearl River Delta region this year to better integrate economic development of Hong Kong, Macau, and surrounding cities in Guangdong province, Li said.
Other 2018 objectives included:
- Cut energy use per unit of GDP by more than 3%, versus 3.4% goal in 2017
- Steadily push forward legislation for a property tax
- Keep registered urban unemployment rate under 4.5%, unchanged from 2017
- Cut about 30 million tons of steel capacity, compared with 50 million ton goal last year
- Defense spending is expected to rise 8.1%, the quickest pace in 3 years.“
Outlook for Monetary Policy: Reuters
“China’s central bank will probably have to respond to an expected U.S. interest rate rise at a particularly sensitive time later this month.
Zhou Xiaochuan, the long-serving People’s Bank of China (PBOC) governor, is widely expected to be replaced during the annual meeting of China’s parliament, which started in Beijing on Monday.
The U.S. Federal Reserve’s rate decision will be made public on March 21, a day after parliament is slated to end, leaving Zhou’s successor a weighty first assignment.
That successor may be Liu He, a trusted confidant of President Xi Jinping. He has emerged as the front runner to take over, Reuters reported on 23 Feb 2018.
In 2017, the Fed raised borrowing costs 3 times and the PBOC followed it twice – in Mar 2017 and Dec 2017 – tapping open market operations’ (OMO) rates higher by 10 basis points (bps) and 5 bps, respectively. Economists say they expect a similar move by the PBOC this time around.
The Chinese market rates are already high relative to regional peers and other major economies, and the government’s deleveraging policies have further tightened financial conditions. Yet, policymakers have been keen to show that China is in step with the global economy and to keep expectations consistent.
“Chances are good that the PBOC will hike along with a Fed hike but in a much more gradual way,” said Zhao Yang, chief China economist at Nomura International in Hong Kong.
Few expect an increase in the official benchmark interest rates – one-year lending and deposit rates – which have been steady since 2015.
However, most believe the PBOC will make small adjustments to the rates it charges for short- and medium-term OMO loans, including 7-day reverse repurchase agreements. Participants in the money market consider the 7-day reverse repo rate as an unofficial benchmark for interbank interest rates, and say they expect that any changes to interbank borrowing costs will gradually translate to the broad economy.
“A gradual but small move timed along with the U.S. Fed (such as in Dec 2017) may help anchor market expectation and reduce market volatilities,” Bank of America Merrill Lynch analysts in Hong Kong wrote in a note, adding that they expected a 5 bps increase in OMO rates in Mar 2018.
Liu, a U.S.-trained economist, is also expected to become a vice premier in charge of economic and financial issues. If he gets that and the central bank job he will become one of modern China’s most powerful economic officials ever.
Zhao of Nomura said he did not think the change of the governor would affect decisions in the current rate cycle.
The PBOC lacks the independence of institutions like the Fed and needs cabinet approval to change benchmark interest rates or the value of the yuan currency. Market rate changes may not be subject to a green light from cabinet.
“Speaking from a global perspective, China is ahead of other central banks raising interest rates, as Chinese 10-year treasury yields hit 4 percent at one point,” said Nie Wen, economist at Hwabao Trust in Shanghai.
“The PBOC would still likely follow the Fed with a rate hike, but a smaller move this time, around 5 to 10 bps, with a strong symbolic meaning,” he added.
Recently, the PBOC has raised rates on days when it has rolled over a type of medium-term loan known as a medium-term lending facility (MLF) that it makes to banks. Two batches of MLFs are due in the coming days – on 7 Mar 2018 and 16 Mar 2018 – but analysts say the PBOC is unlikely to take action on those days because they are ahead of the Fed’s expected move and in the middle of the parliament session.
Nie expects the PBOC to add a cumulative 25 bps to market rates this year, or possibly as much as 50 bps if consumer inflation in China rises above 3% this year.
Some economists, however, see no need for China to increase rates in Mar 2018 because Beijing’s deleveraging campaign has already tightened financial conditions.
“The room to tighten further is really limited as we expect the economy is going to slow this year,” said Claire Huang, economist at Societe General in Hong Kong. “The PBOC actually doesn’t want to raise rates too much. Most of the tightening comes from financial regulations… Tightening from regulations is already enough.”
Also on the horizon this month is a quarterly health check for financial institutions, conducted by the PBOC, which may impinge upon liquidity.” Reuters
^ CNY movements against the USD over the past month (mouseover for inverse) Chart: xe.com
^ Shanghai CSI300 movements over the past week Chart: Google Finance